The Hindu Business Line : ‘Bond futures may not make Govt borrowings costlier’

Dr Dash has done in extensive work in fixed income markets. These include rating some of the sub-sovereign entities, States and local governments in the country. In an e-mail interaction, he explained the potential impact of interest rate futures that was re-launched on August 31.

The interest rate futures or bond futures, to be more accurate, were re-launched on August 31. Is there a possibility that shorting the bond markets will lead to increased volatility rather than increasing the depth?

Interest rate futures (IRF) are standardised derivative products in nature and will be traded on exchanges, unlike over-the-counter traded instruments, which limits their reach.

It also carries lower counter-party risk as the clearing houses eliminate the counter party risks and increase the efficiency of the capital market as a whole. Moreover, it is easier to enter and exit the IRF market depending upon the investors’ risk perception attached to bond futures. Thus, the partial implementation of recommendations made in the report on ‘making Mumbai an International Financial Centre’ by re-launching the bond futures would increase the depth of Indian bond market.

Given the present interest rate risk due to huge Government market borrowings and inflationary pressure, such hedging instrument would attempt to rejuvenate the bond market.

Are the bond futures likely to push up the prices for Government borrowings especially since the borrowing requirement is still about 40 per cent short of the gross borrowing target?

With increased participation in the bond market, bond prices are expected to be more competitive. Moreover, from the point of view of physical delivery of bonds at the time of settlement, the Government had raised greater proportion of borrowings by issuing securities with the maturity period of 5-9 years and 10-14 years, while few issuances will hit the market in September. Details of the issuance calendar of bonds during the second half of current fiscal would further shed light on the issue.

Thus, with frequent bond auctions ensuring adequate supply of deliverable grade securities, bond futures may not make Government borrowings costlier.

Are interest rate futures likely to help in price discovery? Don’t uniform price bids already perform a similar function?

Availability of hedging instrument like interest rate futures might encourage various players, other than banks to participate in bond auctions. Thus interest rate futures would lead to more effective and improved price discovery process.

Most players in the markets are likely to be banks. How far is that likely to impact the balance sheets (on the marked to market category holdings) in an environment of short selling?

At present, more than 95 per cent of banks’ investment is in the form of Government securities. Derivatives would be the most useful tool for the banks to protect their portfolio against any drastic change in yields.

Moreover, the uncertainties related to short-selling exercise would be ruled out in IRF segment. Thus, drastic losses on account of mark-to-market holdings may not hamper the balance sheets of Indian banks, as it used to be till now.

FIIs also are likely to play a major role in the bond futures markets. But will this bring about reconciliation in the forward exchange premia to reflect interest rate differentials?

FIIs, always hunting for new avenues to pour money in growing emerging markets, would definitely like to exploit this derivative segment. But currency risk would remain a significant threat for them. The expected gains from IRF market may get nullified by any adverse fluctuations in exchange rates. Thus as long as the net gains are attractive, FIIs will go long on the derivatives. Yes, to a large extent the forward exchange premia will reflect the interest rate differentials.

Are there likely to be settlement problems especially in view of the limited series of securities available (the notional 10-year YTM fixed is 7 per cent)?

Clear guidelines on settlement mechanism and deliverable grade securities by regulatory bodies leave little scope for any settlement issues. The minimum set criteria for the deliverable grade securities that the total outstanding securities should be Rs 10,000 crore appear to be satisfactory.

Moreover, as RBI introduces new securities under the Government borrowing programme in second half of the current fiscal more series of securities will be available. Still, one needs to be vigilant till the first phase of settlement takes place.

Related Stories:
Bond yields pause on slow Govt borrowings, rise in FII inflows

More Stories on : Interview | Debt Market | Govt Bonds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Grameen Koota to step up credit portfolio

More liquidity than system needs

Repos in corporate bonds to help access cheaper funds

RBI launches outreach programmes in Kerala

Standard Chartered sees opportunity to grab talent

Indian investment in US Treasuries dips in July

Credit Bureau to help lenders track vanishing customers

Vijaya Bank’s festival season offer

SBI on major overseas push

‘Bond futures may not make Govt borrowings costlier’

BoM celebrates Platinum Jubilee