Banks may get to play in exchange- traded derivatives

Mint Road contemplating capital indexed bonds.

The Reserve Bank of India (RBI) may allow banks to trade in exchange-traded derivatives so as facilitate a sound platform for the relaunch of the instruments.

It is also contemplating the issue of capital indexed bonds as part of the government borrowing programme in order to help banks and long-term investors have a cushion against interest rate fluctuations.

These bonds or government securities will be linked to inflation through either the consumer price index or the wholesale price index and help the investors save on their principal in the event of interest rates going down.

According to banking sources, the RBI is likely to prescribe a road map for the bank's entry into the derivatives market, which is dominated mainly by foreign banks.

While a time frame is likely, certain financial parameters might be spelt out so as to ensure proper risk management on the part of participating banks.

The announcement, likely to made as part of the forthcoming monetary and credit policy, ill include both, exchange traded and over the counter derivatives.

While the securities and Exchange Board of India has already issued clarifications allowing the usage of yield to maturity (YTM) model pricing of derivatives, the Bombay Stock Exchange is also understood to have obtained the approval from the Securities and Exchange Board of India for launching the product.

However, a developed market with sufficient buyers and sellers is necessary for the success of the product.

At present, banks can only enter into derivatives to hedge their portfolio and this has tilted the market "" there are mostly buyers and only few sellers like primary dealers.

PDs do not have the requisite the capital base to operate on a large scale.

Market participants are understood to have recommended provident funds' entry as it will facilitate healthy buy and sell sides in derivatives. Provident funds will have bulk quantities to hedge and banks could sell these instrument to them.

This will help provident funds hedge against interest rate fluctuations.

The Insurance Regulatory Development Authority is looking into the matter.