In a bid to strengthen the market infrastructure of the country, the Reserve Bank of India plans to launch interest rate futures in early 2009 along with the changes in the regulatory regime.
A working group was set up to review the experience gained with interest rate futures since its introduction in India in June 2003, with particular reference to product design issues.
?This is a very good step taken by RBI. It would definitely help market participants to hedge their interest rate positions in this market. While the OTC market has its own limitations, exchange-traded interest rate futures will bring about better transparency in pricing,? said a foreign bank dealer.
Market participants have also welcomed RBI?s supervisory review process of the trusts or SPVs set up by banks. ?The SPVs set up by banks are generally unregulated and are subject to an inadequate independent board. As the activities of these entities could be a potential risk to the parent bank and could also pose a systemic risk, RBI?s step of setting up a working group with representatives from the Reserve Bank, banks and credit rating agencies, who are expected to submit their report within three months, is a very good one. It was very essential to regulate the working of such SPVs, just like it is done in developed countries,? said a primary dealer. The group would study various types of SPVs set up by banks, management control by parent banks, related regulatory or supervisory issues and recommend a suitable supervisory framework, RBI said.
RBI has also decided to expand hedging facilities to domestic crude oil refining companies. Accordingly, it is proposed to permit domestic oil and shipping companies to hedge their freight risk with overseas exchanges or OTC markets, with a view to facilitate better management of freight risk.
In respect of other customers who are exposed to freight risks, banks may approach the Reserve Bank for permission on behalf of their customers.
Also, in view of the tight liquidity conditions in the global credit markets, domestic importers are experiencing difficulties in raising trade credits within the existing all-in-cost ceilings. Hence, considering international developments, it is proposed to enhance the all-in-cost ceiling for trade credits less than 3 years to 6 months Libor plus 200 bps. On Friday, the 10-year bond yield ended at 7.80%, its highest since October 16. It ended at 7.56% on Thursday.
?Most market players were expecting a cut in interest rates, which didn?t happen. We expect the yield to touch 7.85% on Monday,? said NS Venkatesh, MD & CEO with IDBI Gilts.
