Mumbai: Markets regulator Securities and Exchange Board of India (Sebi) on Wednesday said it would start seeking exchanges that meet its guidelines for offering interest-rate futures.
The introduction of interest-rate futures is expected to allow investors to hedge risks on borrowing costs.
Borrowing costs: The Sebi headquarters in Mumbai. A panel released the norms for exchange-traded interest-rate futures on Wednesday. Abhijit Bhatlekar / Mint
In such contracts, a borrower and a lender agree to fix the rate at which they will borrow or lend at a future date. As with other futures instruments, such as in commodities, the contract can help protect against rate swings. A panel which included officials from the stock market regulator and the Reserve Bank of India on Wednesday released the guidelines for exchange-traded interest-rate futures.
Interest-rate derivatives, not traded on exchanges, were first introduced in June 2003 for banks and primary dealers, companies that underwrite government debt sales.
“Introduction of interest rate futures (IRF) is a significant reform measure that will go a long way in the development of the debt markets in India,” said B. Prasanna, managing director and chief executive officer of ICICI Securities Primary Dealership Ltd, in a statement. “This product would help the financial institutions to hedge the interest-rate risk inherent in their underlying businesses. In addition, by virtue of being an exchange-traded product, the entire household and corporate sector would also be able to hedge the inflation risk.”
With a large stock of household financial savings on the assets side and an increasing quantum of housing loans on the liabilities side, interest-rate risk is becoming increasingly important for the household sector as well, the panel said in its report. Interest-rate products are the primary instruments available to hedge inflation risk, which is typically the most important macroeconomic risk faced by the household sector.
Investors can trade in a 10-year government security with underlying semi-annual interest of 7%, and the futures contract can have a maximum maturity of 12 months, according to the rules.