Inverse floaters or inverse floating bonds have entered the Indian market. This instrument whose return is inversely related to the interest rate has a checkered history in the US. Nonetheless, they charm the investors with an opportunity to earn high returns in a low interest rate regime.

Indian stock markets have seen the entry of quite a few innovative financial instruments since liberalization in the early 1990s. As the markets mature and investors grow sophisticated there is no dearth of complicated, high risk, high return variations to flood the markets. In a phased manner we have seen the entry of derivatives, options, futures and other hybrid instruments. The latest example of financial engineering to make a firm entry in the Indian scene is "Inverse floaters".

During August 2002, there have been three major bond issues, that have been structured along the inverse floating bonds. Two companies of the Aditya Birla Group, Grasim and Hindalco have recently tapped the markets using these instruments. Grasim Industries, India's third largest cement manufacturer is raising Rs. 50 cr through the issue of inverse floating rate bonds maturing in five years. Grasim followed this issue with yet another issue of similar size and structure. Hindalco soon followed Grasim's issue with another mop of Rs. 50 cr using the same structure.

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