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: The introduction of interest rate futures on National Stock Exchange (NSE) on August 31 has not only deepened India’s derivatives market but also has opened another avenue for investors. Though the options for individuals is very limited at present, experts feel there are a number of benefits awaiting individual investors. This new segment holds out great opportunities for individual investors in bonds, home loan and automobile buyers to hedge against rate risk. Experts feel this segment will see a growing number of day traders in future, propping up the volumes significantly.
On the last trading day, September 4, contracts worth Rs 9,444.85 were traded. There were 5,061 outstanding contracts, or open interest. The underlying asset of interest rate futures is the notional 10-year government of India securities with a notional coupon of 7%.
In fact, interest rate futures was introduced in early 2001 on NSE but it failed to take off due to a number of reasons. First, banks were not allowed to trade at that time, and then there were issues relating to settlement. This time the joint committee of the Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI) has chalked out all modalities in detail, and the market participants are upbeat on this segment.
Data pertaining to the last one week’s trade show that banks are the major participants in interest rate futures market. On the other hand, many broking houses, though registered with the exchanges, are adopting a wait-and-watch policy before plunging into this nascent market.
Individual investors have a variety of reasons to hedge their risk of interest rate fluctuation by taking a position in this market, but the most worrying factor currently is the shortage of expertise. Most top-rung broking houses have either no fixed-income operations or have scarce resources. This apart, experts feel individual investors can effectively invest in this segment, not only to hedge their rate risk but also to make handsome returns.
The most important beneficiaries are investors, especially high net worth individuals, who hold government securities. “The RBI, interestingly, have been keen on increasing retail participation in government securities but for some reason individuals and HNIs were shying away from them. Now that they can effectively protect bond prices in the interest rate futures market, the individual investment in bonds must increase,” said a bond dealer. This will in turn strengthen the interest rate futures market itself, and...
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