Most visitors head out this way to see the Cascadas de Peguche, a series of falls sacred to locals – visitors are still welcome, however, during Inti Raymi, June’s festival of the sun, when locals conduct ritual cleansing baths (you can talk to the Otavalo Tourist office for more information on this ritual). It's a developed site and the cobblestone street marking the entrance has stalls selling handicrafts, drinks and snacks. You can see some nice birds along the trails, too.
Sign in at the registration desk (free, but donations are requested) and follow the short path to the hot springs, a small bridge below the main falls or two viewpoints on either side of the river.