Since the liberalization of Indian economy in 1991, India has
opened its gate of vast opportunities to domestic as
well as foreign players to participate in various
financial ventures. Liberalization has created competition among banks,
both domestic and foreign including NBFCs, mutual funds, etc.
But, risks too have multiplied with increased trading in
different financial instruments, especially with derivative products
either plain-vanilla or structured products. All this led to
increased gyration of interest rates. So, in the wake of deregulation of
interest rates and increased volatility in interest rates, the Reserve Bank
of India (RBI) introduced some hedging instruments, mainly
Over-the-Counter (OTC) traded ones such as Interest Rate Swaps (IRS)
and Forward Rate Agreements (FRA). These products were instant
hits and helped all categories of traders to hedge their risks. The
success of these products prompted the banking regulator to introduce
an exchange-traded product, Interest Rate Futures (IRF), in
2003 mainly to streamline its reach to all kind of investors such as
banks, insurance companies, primary dealers and provident funds. Let
us discuss IRF in detail, what prompted RBI to reintroduce it, its
design issues, and responses.
Popularly known as Bond Futures, IRF globally account for
the largest volume among the financial derivatives traded on
exchanges worldwide. As per the data released by the Bank for
International Settlement (June 2009), the notional principal amount
outstanding in organized exchanges across all futures instruments amounted
to $18.5 tn in March 2009, of which $17.8 tn pertained to IRF. In
Asia, the notional amount outstanding in Exchange Traded Interest
Rate Futures was estimated at $1.9 tn in March 2009. In India,
IRF provide a good avenue for different market participants such
as banks, mutual funds, primary dealers, insurance
companies, foreign institutional investors and retail investors to hedge
and engage in risk management.
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