Interest rate futures made their comeback in India’s financial sector on Monday. With this, the country takes another small step towards a freer capital account.
These exchange-traded futures are derivatives based on an interest-yielding asset such as a government bond, offering a hedge for those who trade in the latter. Just as currency futures—launched last year—help the spot currency market, a liquid interest rate futures market translates into a deeper one for government bonds.
This can go a long way in encouraging more capital flows, especially from the private sector. Public sector banks usually dominate the market for government bonds.
Yet, liberalizing the capital account isn’t so easy, and has rightly sparked thorny debates. Mint has always held that India’s regulators should embrace this liberalization incrementally and cautiously. For instance, the first attempt to introduce these futures in 2003 seemed premature. It’s reassuring that regulators have taken the time to make repairs, and then ventured into this market again.