What are Interest Rate Futures (IRF) in India?

What are interest rate futures in India; Interest rate futures (IRF) What are Interest Rate Futures in India?

NSE Launched Interest rate futures (IRF) on this Tuesday, 21st January, 2014 in India. Interest Rate Futures in India are linked to a movement of 10 years Govt. of India Bonds. This new product in financial market provides additional scope for day traders, investors and financial institutions and banks cover their risk against fluctuations in interest rates. In this article, I would detail about this new product interest rate futures in India, its features and to whom these Interest rate futures are suitable for investment

Also Read: What are derivatives and how you can make profit out of it?

What are Interest Rate Futures in India (IRF)?

Interest rate futures are standardized interest rate derivative contracts traded on the stock exchange with an option to buy or sell an interest rate on a specific date at a specific price. These are linked to a movement of 10 years Govt. of India bond. Bonds are most liquid debt paper in the country. We all aware that bond prices rise when fall in interest rates. Since these bonds offer higher interest rates, demand for such bonds would increase. Similarly, when interest rates increase, bond prices would fall as existing bonds offer low interest rates and there is less demand for such bonds.  

While MCX Stock Exchange has already launched this product sometime back, NSE has launched this yesterday, i.e. Tuesday (21st January, 2014). BSE would be launching this on 28th January, 2014.

Is there any difference between Interest rate futures (IRF) Vs stock or Currency Futures?

There is no difference between interest rate futures and stock or currency futures except they trade different products. This is an old concept.

How exactly do Interest rate futures in India work?

If one expects that interest rates would rise in the future, then they can go long on Interest rate futures and buy them. In future, if the interest rate goes up, they can sell and make profit.

Similarly, if one expects that interest rates would go down in the future, then they can go short on interest rate futures and sell them. In future, if the interest rates go down, they can buy and make a profit.

To whom does the interest rate futures in India are suitable?

There are few classes of people to whom Interest rate futures are suitable

1) Derivative traders: If you trade in derivatives (futures), this interest rate future is best suitable for you to earn money. Since you already know how to practice trading in derivatives and understand various economic cycles, it may be worth trying this new financial product to earn money

2) Professionals understanding how interest rate movement happens: There are several professionals and analysts who can understand how interest rate movement can happen in various economic cycles. If you are able to predict interest rate movement, you can make excellent money through these interest rate futures (IRF).

3) Investors of tax free bonds: If you have invested in tax free bonds and if you think interest rates are expected to go up, then your tax free bonds price is expected to fall. In such case to cover the risk you can consider interest rate futures to cover such risk. However this would be notional amount as on one side your tax free bond price would fall down and otherside you would gain in interest rate futures.

4) Banks protect from risks: As per banking law, banks are supposed to invest in Govt of India bonds. They need to incur loss due to increase in interest rates. They can hedge their losses by investing in interest rate futures.

Also Read: RBI Increases repo rate – What is the impact?

How Interest rate futures trading currently?

On Monday, 20th January, 2014, 10 year benchmark 8.83% 2013 Interest rate futures traded at Rs 101.65 for a total of Rs 1.15 Bn.

Conclusion: Interest rate future is a new product in NSE and BSE. However the concept of the future is old. If you are good professional and able to predict interest rate fluctuations, you can make decent money through this product in financial markets.

Readers, do you trade in futures? What is your opinion about Interest rate futures?

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Interest rate futures in India

Suresh KP

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