The Reserve Bank of India (RBI) is set to launch two new instruments by the end of this year — inflation-indexed national saving securities (IINSSes) and cash-settled 10-year interest rate futures (IRFs). The Street, however, feels these instruments might not see significant investor interest. In the second quarter review of monetary policy on Tuesday, RBI Governor Raghuram Rajan said IINSSes would be launched for retail investors in November/December, while guidelines on cash-settled 10-year IRF contracts would be issued by mid-November so that exchanges could launch these products by December-end. The 10-year inflation-indexed bonds launched earlier this year, which were linked to the Wholesale Price Index, had failed to attract much interest from investors. In 2003 and 2009, IRFs had also failed to garner much interest, owing to faulty design. Ramanathan K, executive director and chief investment officer, ING Mutual Fund, said: “The appetite would be lower for IINSSes because Indian retail investors want a fixed rate of returns, not variable returns. To diversify their portfolio in such instruments, there would always be high net-worth individuals. We need to see the pricing of these instruments and whether retail investors would understand the product. Initial euphoria might be there.” The stock market was better and bigger than the IRF market, Ramanathan added. “You can sell in the swap market, as well as in the futures market.
The participation will continue to be more in the overnight indexed swap market, rather than in the IRF market.” The secondary market continues to lack liquidity. “For investors to buy IINSSes, the biggest hindrance is secondary market liquidity. There will be demand for these instruments. But for this market to actually become vibrant, ease to transact is important. There should be an option to liquidate. For example, government bonds are very liquid, but these aren’t liquid for retail investors. For tax-free bonds, too, secondary market liquidity is not very high,” said Alok Singh, chief investment officer (fixed income), BOI AXA Mutual Fund.