Interest rate futures to be re-launched

MONETARY POLICY 2008-09/ POLICY AND MARKETS

An interest rate future is a standardised contract traded on an exchange to buy or sell an underlying asset ( rupee interest rate in this case ) at a certain date in future at a specified price today.

The product is used to hedge volatility in the Indian interest rate . The RBI has set up an internal working group and is re-working the product.

 

Moreover, RBI plans to introduce STRIPS -- separate trading for registered interest and principal of securities ---- in government securities by the end of 2008-09. The government securities Act in 2006 already provides the legal basis for the launch of STRIPS.

STRIPS is the process of separating the interest and principal portions of a security, which then may be sold separately in the secondary market.

It allows investors additional liquidity while holding government paper since the individual interest and principal components can be traded as separate securities. These are popular with investors who want to receive a known payment on a specific future date.

The are also called "zero-coupon" securities, since the only time an investor receives a payment from STRIPS is on maturity.

With the enactment of Payment and Settlement Systems Act 2007, the RBI now proposes to introduce a separate clearing and settlement arrangement for OTC rupee derivatives.

Over the counter ( OTC ) derivatives are traded off the stock exchanges, more like bilateral one to one trades and include interest rate swaps and rupee dollar forwards.

The RBI has now made the settlement for negotiated dealing system exclusive to designated banks.