RBI allows IRFs on 91-day T-Bills

The Reserve Bank of India has allowed interest rate futures (IRFs) trading on 91-day Treasury Bills (T-Bills).

“We have decided to introduce interest rate futures on 91-day Treasury Bills issued by the Government of India,” the central bank said in a release on Monday.

“The 91-day T-Bill is a liquid short-term instrument. Hence, trading in futures on T-bills will give an indication about the interest rate trend at the short of the curve,” said G A Tadas, managing director with IDBI Gilts, a public-sector bond house.

In 2009, RBI allowed IRF trading on 10-year government securities.

“This means we will now have futures at both long and short ends of interest rate curve,” said the head of trading with a foreign bank.

“However, to get clarity on the interest rate curve, futures trading should be available on more instruments, with varying maturities across the curve. It would help build a mature market for interest rate futures,” the official said.

The central bank has allowed cash settlement in futures on T-Bills.

“The contract shall be cash-settled in Indian rupees,” said the release. This feature was not available in futures on the 10-year gilt. Instead, the contract was settled by physical delivery, resulting in the dull offtake of the instrument.

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. The central bank had also issued directions regarding the same.

The final settlement price of the contract shall be based on the weighted average price or yield obtained in the weekly auction of the 91-Day Treasury Bills on the date of expiry of the contract.