The interest rate futures (IRFs) trading in the country will get a boost in coming days, as Life Insurance Corporation (LIC) and Central Bank of India have agreed to provide support to the exchange-traded product. Both these will ensure adequate liquidity on the National Stock Exchange (NSE)— the bourse where IRFs are traded.
LIC will purchase the Government of India (GoI) securities from those who want to liquidate the securities received against their IRF obligations at a small yield spread over the Fixed Income Money Market and Derivative Association (Fimmda) valuation rates. On the other hand, Central Bank of India would offer securities from its book to members who want to meet their IRF obligations.
“The IRF market is expected to see larger volumes in coming days, as the promised support from LIC and Central Bank will remove concerns about the physical delivery settlement,” said a member of NSE.
There has been a tepid response to IRF, which made a comeback in August, six years after an attempt to allow companies to hedge their risks failed. The average daily turnover on NSE had declined from over Rs 267 crore on August 31 to around Rs 10-20 crore and a number of contracts traded too fell significantly.
The main reason cited by market players was poor response from banks and insurance companies, which had raised liquidity concerns. However, the move by NSE to rope in LIC and Central Bank to create liquidity may boost trading. Globally, IRFs account for 25-30 per cent of derivative transactions.
