By Neha Dasgupta and Swati Bhat
MUMBAI (Reuters) - Indian regulators could clear the way for the electronic trading of interest rate swaps as early as this month, officials said, as part of a Reserve Bank drive to increase trade volumes in the country's under-developed domestic debt market.
Officials at the Clearing Corporation of India (CCIL), the settlement platform that will handle the trades, said a final approval from the Reserve Bank of India was due within weeks, paving the way for trading to begin possibly in March.
The shift to an anonymous and more transparent electronic trading platform is expected to boost trading volumes for rate swaps, which averaged 78.7 billion rupees ($1.26 billion) a day in November in the current over-the-counter market.
"Online trading will be a very important development for the market," said Bekxy Kuriakose, head of fixed income trading at Principal PNB Asset Management in Mumbai. "Since there is going to be a central counterparty, it will definitely help improve market volumes."
The RBI has sought to develop a more active corporate debt market in India, to help lower the country's comparatively high cost of capital at a time the government is seeking to reboot the economy.
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Demand for the swaps - which allow investors to hedge or bet on rates - would also likely be lifted by a widely expected rate cut, as India's inflation eases.
Indeed, both the one-year and five-year swap rates have fallen sharply on expectations the RBI will start cutting interest rates as early as its next policy review in February.
BUILD-UP WILL TAKE TIME
Traders say the five-year swap rates, currently trading at 7.04 percent, are pricing in cuts of at least 100 basis points in India's policy repo rate over the next year.
Still, analysts warn that the development of electronic trading will likely take time, as lenders upgrade their current trading platforms with the CCIL and build up their operations, including back office functions.
Bond futures, introduced last year by the central bank, had a slow start but have experienced a trading surge in recent months, as expectations of lower interest rates have sparked a rally in government debt.
Attracting more state-run lenders will be key, given the swap market has so far been dominated by a handful of foreign banks.
State-run lenders are the biggest traders of government debt, but they have been hesitant to trade rate swaps.
"The state-run banks are scared of derivatives, the word itself," said a senior trader with a foreign bank.
"An online trading platform is good for the market but the product will remain the same, risk will remain the same, so state-run banks will take their time to join in," he said.
($1 = 62.6800 rupees)
(Editing by Rafael Nam and Richard Borsuk)