Derivatives Market Shows Interest Rate Will Ease

With the implicit rates in the interest rate derivatives markets sinking to new lows, corporates can rest assured that the rates will only ease in the future.

The derivative market is a window into the future as the rates are expectations-driven and the spot rates normally track them. Consider two important indicators: the overnight index swap (OIS) and the implied rupee curve, based on forward premiums, which both signal lower rates.

The first is a swap linked to the overnight call money market rates and the second is a derivative product on the rupee-dollar forward premium curve. Both the instruments are widely used by companies to hedge their positions on the interest rate and foreign exchange fronts.

The OIS rate has dipped below the bank rate (6.5 per cent) for the first time and is now hovering at around 6.35 per cent. In fact, early last week it was around 6.55 per cent but dipped by 20 basis points in the last few days. This product is a hedging instrument against any short-term spikes or fall in call rates.

The one-year implied rupee curve, based on forward premiums, sank to below 7 per cent last week for the first time since this product was introduced. This product helps companies to hedge their dollar exposure. In mid-June it was over 8 per cent.