The Indian interest rate swap market has witnessed an enormous growth in the recent past. Though the volumes are not as huge as in the government securities market, the growth rate depicts clearly that India might be heading towards a real money market, which RBI and the market participants have dreamt for long. But there are some constraints that need to be addressed in order to ensure the smooth development of this market. The onus for the development of this market rests on the shoulders of the Central bank, the customers, as well as the market itself.

From feeble beginnings about four years ago, when two or three MIBOR-linked swaps traded a month for a total volume of around Rs. 25-30 cr, the domestic interest rate swap market trades around 1,000 cr a day, with about 65% of the volume in MIFOR swaps (linked to the Mumbai Interbank Forex Offered Rate, which is defined as LIBOR plus the INR/USD premium to the relevant tenor) and the balance in OIS (i.e., Overnight Interest rate Swaps linked to overnight MIBOR). While this is still peanuts compared to the gilts market, which trades around Rs. 5,000 - 10,000 cr a day, the growth we have been seeing—particularly in MIFOR-linked swaps—is encouraging and suggests that we are getting closer and closer towards real money market, something that RBI and market players alike have been trying to develop over a decade.

Note that, we still don't have an inter-bank money market—akin to, say, the LIBOR market internationally. Thus, banks cannot borrow for, say 2 years, load on their cost of reserves and a credit spread and fix a 2-year lending rate for a corporate client. Equally, there is no well-defined and widely accepted benchmark that banks can use to price floating rate loans to their clients. However, with the MIFOR market growing strongly— daily volumes have risen to Rs. 500-700 cr in about six months compared with nearly four years that it took the MIBOR market to get to that level—it would seem that we may be in the process of defining a real domestic interest rate benchmark.

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