RBI allows overseas investors to bet on rate futures
, ET Bureau|
Updated: Mar 02, 2018, 09.08 AM IST
MUMBAI: The Reserve Bank of India has allowed foreign portfolio investors to invest in interest rate futures (IRFs) market as it has created a separate limit of Rs 5,000 crore for taking long position.
The move should help deepen the market, which has been struggling to gain momentum with large volumes. Institutional and wealthy investors normally use such market either to mitigate interest rate fluctuations or trade.
“To facilitate further market development and to ensure that access of FPIs to IRFs remains uninterrupted, it has been decided to allocate FPIs a separate limit of Rs 5,000 crore for long position in IRFs,” the central bank said in a late evening notification on Thursday.
Earlier in August last year in its bi-monthly monetary policy statement RBI proposed of a separate limit of IRF for foreign portfolio investors.
FPIs, registered with Securities and Exchange Board of India, are permitted to purchase or sell Interest Rate Futures subject to a few conditions, RBI said.
Rate futures are no different from stock and currency futures on which individual traders and institutions have honed their skills. In IRF contracts, a trader will go long when he expects the price of the 10-year underlying bond to rise.
“The total gross short (sold) position of any Foreign Portfolio Investor shall not exceed its consolidated long position in Government securities and Interest Rate Futures, at any point in time,” RBI said.
Rate futures were first introduced in the Indian markets in 2003 only to find consecutive revised versions. Former governor Raghuram Rajan introduced another revision with relaxed norms about four years ago.
The rate derivative market has assumed significance recently after deputy governor Viral Acharya insisted on the need of increased participation by banks. Lenders have incurred huge mark-to-market losses with the benchmark yield surging more than 100 basis points in the past six months. Bond yields and prices move in opposite directions.
Wider participation by banks in interest rate derivative markets - both futures and swaps - is necessary for improving liquidity in these markets, which is necessary for banks to off-load their significant duration risk onto others, Acharya said one and a half month ago.
The latest limits prescribed for investment by FPIs in G-secs (currently ? 3,01,500 crore) will be exclusively available for investment in G-secs.
The move should help deepen the market, which has been struggling to gain momentum with large volumes. Institutional and wealthy investors normally use such market either to mitigate interest rate fluctuations or trade.
“To facilitate further market development and to ensure that access of FPIs to IRFs remains uninterrupted, it has been decided to allocate FPIs a separate limit of Rs 5,000 crore for long position in IRFs,” the central bank said in a late evening notification on Thursday.
Earlier in August last year in its bi-monthly monetary policy statement RBI proposed of a separate limit of IRF for foreign portfolio investors.
FPIs, registered with Securities and Exchange Board of India, are permitted to purchase or sell Interest Rate Futures subject to a few conditions, RBI said.
Rate futures are no different from stock and currency futures on which individual traders and institutions have honed their skills. In IRF contracts, a trader will go long when he expects the price of the 10-year underlying bond to rise.
“The total gross short (sold) position of any Foreign Portfolio Investor shall not exceed its consolidated long position in Government securities and Interest Rate Futures, at any point in time,” RBI said.
Rate futures were first introduced in the Indian markets in 2003 only to find consecutive revised versions. Former governor Raghuram Rajan introduced another revision with relaxed norms about four years ago.
The rate derivative market has assumed significance recently after deputy governor Viral Acharya insisted on the need of increased participation by banks. Lenders have incurred huge mark-to-market losses with the benchmark yield surging more than 100 basis points in the past six months. Bond yields and prices move in opposite directions.
Wider participation by banks in interest rate derivative markets - both futures and swaps - is necessary for improving liquidity in these markets, which is necessary for banks to off-load their significant duration risk onto others, Acharya said one and a half month ago.
The latest limits prescribed for investment by FPIs in G-secs (currently ? 3,01,500 crore) will be exclusively available for investment in G-secs.
