One of the anomalies in the Indian fixed income market was the persistent, negative spread between the Overnight Index Swaps (OIS) rate and the GOI Securities (GOI Sec) rate. In this note, we present a arbitrage portfolio, which are a set of positions on the OIS, CBLO at CCIL and GOI Securities so as to profit from the anomaly. Back-testing this portfolio for the period from Feb 2008 to April 2009 shows that the arbitrage returns would have been 41 percent annualised. A deeper analysis suggests that this arbitrage opportunity persisted because of entry barriers into the OIS, CBLO and the GOI Sec markets.

Citation: Implementing an arbitrage trade using GOI Bond-Interest Rate Swaps, Nidhi Aggarwal and Susan Thomas, FRG Technical Note TR-2011-7-28, July 2011.