Interest Rate Futures in India

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Excerpts

This was not the first time that IRFs had been trading in India. IRFs were first launched in India in 2003. The need for such instruments was felt from the time the economy was liberalized. The Government of India accelerated reforms in the early 1990s and one of the major steps that it took was to deregulate the economy and embrace liberalization. In this process, the government deregulated the interest rate in the late 1990s. Deregulation of interest rates led to volatility in the rates and a need for interest rate hedging instruments arose...

Interest rate futures give investors an opportunity in the fixed income market to hedge their interest rate risk by using this instrument. By locking into a price, the contract helps eliminate the interest rate risk. Until now, the investor could only stand and watch whenever the interest rate rose and the value of his/her portfolio was destroyed. Now the investor can go short on interest rate futures if he/she thinks that the interest rate will rise and will cover any depreciation losses on his/her portfolio due to fall in bond prices...

IRFs were relaunched after taking into consideration the recommendations of the committee. As in the case of the equity markets, the contract size was fixed at Rs. 0.2 million. Trading hours are between 9 am and 5 pm from Monday to Friday. The contracts will mature in 12 months, with 4 fixed quarterly contracts expiring in March, June, October, and December. The contracts are based on a 10-year government bond which bears a notional interest rate of 7% per annum and pays interest semi annually. This choice of bond is in line with the bond futures traded around the world...

Interest rate futures were launched with the motto of helping all investors to hedge against a volatile interest rate. However, some dealers noted that retail investors might not participate in this market due to the complex design of the product. Manish Gupta, Commodities Editor, reports that the major users or participants for this would be mutual funds, banks, and institutes more than the retail markets. However, poor response from banks, mutual funds, and insurance companies was the major concern...

In March 2011, the RBI allowed interest rate trading in 91-day Treasury Bills (T-Bills) . After this, NSE launched interest rate trading on 91-day T-Bills on July 4, 2011. On the very first day, 39,755 contracts of total traded value of about Rs 7.31 billion were traded...

Exhibit I: Daily Turnover of IRF from August 31, 2009 to August 30, 2010
Exhibit II: Interest Rate Futures Contract Specification

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