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Indian investors should prioritize receiving bets on overnight indexed swaps over taking fresh long positions in bonds as potential gains from OIS are expected to outperform bonds once the global rate-cut cycle begins, a BNP Paribas official said.

Interest rates have remained elevated globally as many countries prioritize inflation management. However, they now stand on the verge of an easing cycle.

The US Federal Reserve is almost certainly expected to cut rates at its meeting next week.

"The INR swaps rally more in policy a rate cutting cycle and outperform versus bonds as we have seen historically," Chandresh Jain, Asia rate and FX strategist, global markets at BNP Paribas told Reuters on Thursday.

"Additionally, the market already has long bond positions, so bonds will underperform in rallies now," he added.

India's five-year OIS rate stands at around 5.98%, while the 10-year benchmark 7.10% 2034 bond yield is at 6.82%, a spread of over 80 basis points.

The five-year OIS rate has eased over 40 bps since the start of this quarter, while the 10-year bond yield has declined by 18 bps in the same period.

Jain anticipates that bond yields and swap rates will decline further; however, a widening of spreads is expected, potentially reaching 90-95 basis points over the next three months.

Markets have currently priced in an aggregate of 175 bps of easing by the Fed in the next six months, but Jain expects the central bank to deliver five rate cuts of 25 basis points each till March.

He expects the Reserve Bank of India to cut rates by only 50 bps during the same period, adding that though he found receiving outright Indian OIS attractive, he would suggest waiting "for a better entry level".