Another attempt is now being made to provide an avenue for individuals and banks, insurance companies and other institutions to hedge their interest rate risks.
The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) Standing Technical Committee on Wednesday released a report listing out the mode for operationalising trading in interest rate futures.
SEBI report observed that interest rate risks are banes of not only financial sector but also corporate and household sectors. “With a large stock of household financial savings on the assets side and an increasing quantum of housing loans on the liabilities side, interest rate risk is becoming increasingly important for the household sector as well,” the report said.
Interest rate products are the primary instruments available to hedge inflation risk which is typically the single most important macroeconomic risk faced by the household sector. It is, therefore, important that the financial system provides the household sector greater access to interest rate risk management tools through exchange-traded interest rate derivatives. Once they start trading on bourses, individual investors could access the instrument that was earlier available only for institutional investors, when it was first introduced in 2003.
The National Stock Exchange had then introduced exchange traded interest rate futures but it failed to get institutional investors interested. Eligible exchanges wanting to offer the facility for trading in interest rate futures have been asked to apply to SEBI.
Banks would be able to hedge all their interest risks including investments and loans, unlike earlier when they were permitted to hedge only the risks in their investment portfolio.
The minimum size of the interest rate futures contract would be Rs 2 lakh with the underlying asset being a 10-year government bond bearing a notional coupon of 7 per cent. The maximum maturity of the contract would be 12 months.