RBI-Sebi panel for exchange-traded interest rate futures

After launching exchange-traded currency futures, India may start exchange-traded interest rate derivatives, if a report by an RBI-Sebi panel is accepted.

The panel today mooted the idea of these derivatives, based on 10-year government bond yields, to help banks, insurance firms and even households guard against volatility in interest rates.

The RBI-Sebi Technical Panel on Exchange-Traded Currency and Interest Rate Derivatives, constituted in 2008, suggested allowing those having a networth of Rs 1 crore to be a trading member and those with Rs 10 crore networth to be clearing member in interest rate futures.

The contract would be settled by physical delivery, the panel said.

Standardising the norms for such instruments, the panel has said interest rates derivatives could be based on the sovereign bond carrying notional coupon rate of 7 per cent with semi-annual compounding and a contract size of Rs 2 lakh for a maximum period of one year should be allowed.

Interest rate derivatives assume importance in current times, since there is too much volatility in these markets. While interest rates were rising in India before Lehman Brothers filed for bankruptcy in mid-September, they changed direction after that and started declining, even though not drastically.