Trading volumes in interest rate futures hit as rate cut hopes seen limited

While one more rate cut is expected this year, the timing is uncertain

Trading volumes in interest rate futures (IRFs), which had touched an all-time high earlier this year, have been coming down, as the scope for further rate cuts is seen limited by the Street.

Data from exchanges show that the daily turnover had touched an all-time high of Rs 10,643 crore on February 26, but in recent times, it has come down significantly. In recent times, the daily turnover has ranged between Rs 1,000 crore and a little over Rs 5,000 crore.

“The declining volume is largely a reflection of what the market is expecting. Volumes pick up when market players expect rate cuts. At this point of time, there is uncertainty around the timing of the next rate cut and that is why volumes have come off. Till stability comes in the bond market volumes may be slightly low,” said Piyush Wadhwa, head – trading at IDFC.

The Reserve Bank of India (RBI)’s definition of IRF is, “a standardised interest rate derivative contract, traded on a recognised stock exchange to buy or sell a notional security or any other interest-bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract”.

Since the start of 2015, RBI has cut the repo rate or the rate at which banks borrow from the central bank by 75 basis points to 7.25 per cent. The street expects one more rate cut in the financial year which will end on March 31, 2016. However, the timing of the rate cut is uncertain.

“The exchanges are contemplating the launch of certain new bond futures very shortly. So traders are probably waiting for the new launch due to which volumes have come down,” said Ashutosh Khajuria, executive director, Federal Bank.

In December 2013, RBI had made a third attempt to launch IRFs. The previous two attempts had witnessed a lukewarm response. To attract traders, cash settlement was also permitted in IRFs. It is learnt that in the past RBI had pressurising banks to trade in IRFs, due to which trading volumes had started picking up.

IRFs were launched for a second time in August 2009, while the earlier launch was in 2003. Both attempts had failed to attract traders, due to which there were meagre volumes.