NSE to launch interest rate futures on 91-day bills from Jul 4

The National Stock Exchange (NSE) will launch interest rate futures on the 91-day treasury bills from July 4, which will help banks, mutual funds to hedge their exposure, sources said.

Interest rate futures (IRF) is a standardised interest rate derivative contract traded on a stock exchange to buy or sell an interest bearing instrument at a specified future date, at a price determined at the time of the contract.

"The National Stock exchange is launching interest rate futures contracts on the 91 day government of India treasury bills from July 4," an official source said.

The product comes as a huge bonus to the secondary market at a time, when interest rates are very volatile. It would help banks, corporates and mutual funds to hedge their exposure to interest rates.

The Reserve Bank of India has allowed interest rate futures trading on 91-day Treasury Bills (T-Bills) in March, in a move to broadbase the interest rate futures market. Earlier, interest rate futures were available only on 10-year government bond.

The new product would be traded in the currency segment of the exchange so there is no requirement of any new normalities of a new account.

When contacted, an NSE spokesperson said the new product will be highly beneficial for the market.

The interest rate futures would be cash settled. As a result, investors can trade without the worry of being saddled with illiquid contacts, which could have been the case if the contracts were physically settled.

Besides, the cost of trading in interest rate future would be very low, because there is no Securities Transaction Tax and margins are low, as compared to trading in equities and equity derivatives.

Since the time of inception, volumes have remained thin in IRFs on 10-year gilt as they were considered illiquid by market players. Thus, the introduction of IRFs on Treasury Bills will help develop the market.

In case of IRF, on the 91-day treasury bill, the final settlement price of the futures contract is based on the weighted average price/ yield obtained in the weekly auction of the 91-day treasury bills on the date of expiry of the contract.