The country's largest bourse National Stock EXchange (NSE) today said that it would not charge any transaction fees on trade in interest rate futures for one more year.
Interest rate futures, which were launched in India less than two years ago, allow investors to benefit from taking positions about rise or fall in interest rates.
In order to encourage active participation in interest rate futures trading, the NSE had announced transaction charges waiver in July 2010 till March 31, 2011.
In a circular issued today, the bourse said that "it has been decided to extend waiver of transaction charges in Interest Rate Futures till March 31, 2012".
Interest Rate Futures are derivative products that allow investors to buy or sell a notional interest-bearing instrument, such as government debt bond, at a specified future date and at a price determined at the time of the contract.
The NSE said that those trading in interest rate futures at any time during the waiver period would be required to make a lump sum contribution of Rs 500 as contribution to Investor Protection Fund.
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As per the latest monthly bulletin of market regulator Sebi, the total turnover of interest rate futures declined by 35.2% in February 2011. The turnover stood at Rs 20 lakh in February, as against Rs 30 lakh in the previous month.
As per Sebi, NSE had begun trading in interest rate futures on August 31, 2009 and total turnover during the fiscal year ended March 31, 2010 stood at Rs 2,975 crore.
However, it fell sharply in the fiscal 2010-11 and the total turnover for this financial year till February 2011 was only Rs 62 crore.
The average daily turnover also fell from Rs 21.2 crore in 2009-10 to Rs 0.3 crore in the latest fiscal.
Trading in interest rate futures allows investors -- mostly banks, insurance companies, funds and other corporates -- to hedge their risk from rise or fall in the interest rate on account of their exposure to debts.
Firms that may suffer losses due to fluctuations in interest rates use these contracts to hedge or reduce their risk.
Besides, speculators also use these contracts to bet on lower or higher market interest rates in the future. The value of the contract rises and falls in an inverse proportion to the rise and fall in market interest rates.