It's second death for interest rate futures

But as the market for interest rate futures failed to pick up and almost vanished, it was reintroduced in August 2009 with a lot of hope. Initially though the market picked up, it gradually lost steam heading for a second death. The figures speak for themselves: in September 2009 the total trading volume in interest rate futures was Rs 1473.37 crore from 79,648 contracts, with average trading value of Rs 77.55 crore. In December 2009 trading value dropped to Rs 215.32 crore and average to Rs 10.25 crore. Now, in February 2010 the trading value has dropped to a piffling Rs 57.42 crore (a fall of 96 per cent from the peak) and the average to only Rs 3.02 crore.    

Lack of interest
Talking to Deccan Herald, Capitals Equity Head Jagannadham Thunuguntla said, “Interest rate futures is on a deathbed due to complete lack of interest among the participants.” In fact, in some of the trading days the volume has been as low as Rs 9 lakh, he said. Just how low is this? Here is a comparison, on a typical day, the trading volume in Indian equity markets (NSE Cash, BSE Cash, NSE F&O) is in the range of Rs 100,000 crore.

Deals size tiny
Why is interest rate future market dying again? Lack of awareness among the Indian financial institutions is a major reason while the foreign financial institutions find the Indian market too small and the size of the deals tiny.

The second reason is the lack of depth because only two government securities have been introduced for future options while large number of other government bonds and corporate bonds are still out of the purview of interest rate futures.

Thunuguntla feels that to revive this promising financial product and to make it robust, a long term planning is required. We need to create much more awareness on the efficacy of interest rate future as a hedging tool against interest rate volatility, there should be many more securities. More money from retail investors must be canalised to institutions like mutual funds, insurance companies and pension funds so that they become much bigger in size.