Interest Rate Futures in India

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"The introduction of IRFs in the current form represents a significant step forward in the development of debt market reforms in India. Interest rate risk is one of the most basic risks faced by all the significant stakeholders in this economy and this product gives them the ability to hedge these risks. Both retail and institutional segments are likely to benefit from this product significantly. And over a period of time, it's also likely to bring newer and diverse entrants to participate in the fixed income market which has so far been dominated by primary dealers and banks treasuries." ¹

-B Prasanna, MD & CEO, ICICI Securities Primary Dealership Ltd.² , August, 2009.

"There's really good potential demand for more transparent derivatives such as futures for hedging interest-rate risk in the emerging economic scenario." ³

-Krish Ramkumar, Fund Manager, Sundaram BNP Paribas Asset Management Co. Ltd. ,⁴ Mumbai, India, August, 2009.

On August 31, 2009, the National Stock Exchange (NSE)5 re-introduced Interest Rate Futures (IRFs)6 in India with the aim of providing a hedging instrument to investors against volatile interest rates. On the occasion, Ashok Chawla, the then Union Finance Secretary, said, "The product was re-launched with re-designed parameters; banks are allowed to trade and FIIs can participate."7 Earlier, in 2003, the Reserve Bank of India (RBI)8 had allowed trading in IRFs; however, it did not succeed due to an overly complex pricing system, accounting treatment, and banks, the biggest buyers of government securities, not being allowed to trade in the segment.

On launching day, IRFs registered 14,559 contracts for a total value of Rs.⁹ 2.67 billion. However, the December 2009 contract was the most active with 13,789 contracts being traded. The contract that expired in December 2009 closed at a yield of 8.20 percent on the first day of its launch.

Vineet Malik, Head of interest rates trading at HSBC India¹⁰ , said about volume, "The futures market has got a reasonably positive response. Volume is fairly healthy for the first day and as and when people get permission to trade in this market, volumes should increase.¹¹" However, within a month of re-launch, the total value of trade fell dramatically. The value of total trade was Rs. 225.4 million on September 29, 2010. After one year of the re-launch, on August 30, 2010, the total value of trade was Rs. 0.20 million. According to experts, the banks had reduced their participation for fear of illiquidity. Due to this, the trade value had fallen to almost nil.

Kamal Mahajan, Chief Manager, Treasury, Bank of Baroda¹² , said, "The product has been launched in a hurry. They should have ensured that the banks and other participants have the required risk management system to enter such trades. Also, there is not enough clarity on the delivery front.¹³"

Excerpts - Next Page>>

1] "You Can Trade in Interest Rate Futures from Monday," http://economictimes.indiatimes.com/Markets/Stocks/Market-News/You-can-trade-in-interest-rate-futures-from-Monday/articleshow/4934886.cms, August 26, 2009.
2] ICICI Securities Primary Dealership Ltd. was one of the leading company in Indian fixed income and money market.
3] Anil Varma, "India Bond Futures Market may Succeed, Standard Chartered Says," www.bloomberg.com/apps/news?pid=newsarchive&sid=a5HPL4XtmdlE, August 31, 2009.
4] Sundaram BNP Paribas Asset Management Co. Ltd was privately owned investment manager company.
5] In 2013, National Stock Exchange (NSE) was the leading stock exchange in India in terms of daily turnover.
6] An Interest Rate Future (IRF) is a contract to buy or sell a debt instrument (10-year government bond) at a price decided in advance for delivery at a future date.
7] "NSE Launches Interest Rate Futures," www.hindu.com/2009/09/01/stories/2009090161851600.htm, September 1, 2009.
8] The Reserve Bank of India (RBI) is the central bank of India.
9] As of February 2013, US$1 was approximately equal to Rs.53.87
10] HSBC India is the part of London, UK based multinational banking and financial services company – HSBC.
11] Neha D'Silva and Saikat Chatterjee, "India Kicks off Interest Rates Futures Trading," http://in.reuters.com/article/2009/09/02/idINIndia-42098520090902, September 2, 2009.
12] In 2013, Bank of Baroda was one of the leading public sector banks in India.
13] Anirudh Laskar and N. Sundaresha Subramanian, "Not Many Takers for Interest Rate Futures," www.livemint.com/Money/fYxMwYJDqDcRiSJDOZVodL/Not-many-takers-for-interest-rate-futures.html, September 9, 2009.

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