Interest Rate Futures in India: Future Trading and Spot Market Volatility

The introduction of trading in interest rate futures in the country heralds the beginning of a new era in the fixed income derivatives market. Initial hiccups with regard to the product design and variations from the global standards would settle down over a period of time and the product would emerge as a path breaker, paving the way for many more initiatives on the derivatives front. The introduction of trading in interest rate futures in India is one more step towards integration of the Indian Securities Market with the rest of the world. Globally, interest rate derivatives are the darlings of the market and account for around 70% of the total derivatives transactions across the economies. In India, it may be seen as a path breaking initiative because it is expected to pave the way for various innovations at the derivatives front in the time to come. Although market participants have unanimously appreciated the initiative, there appears to exist certain apprehensions in their mind with regard to the product design and impact upon the volatility of the interest rate. This study attempts to address those issues.