A new financial instrument is soon going to float in the Indian markets. SEBI and RBI are on full works to launch interest rate futures by January 2009.

An interest rate futures contract is an agreement to buy or sell a package of debt instruments at a specified future date at a price that is fixed today. The underlying assets of an interest rate futures contract are different interest bearing instruments like Treasury Notes, Treasury Bills, Treasury Bonds, deposits and so on. According to Bank of International Settlements (BIS), the size of such instruments is globally set at more than $45 trillion.

A few years ago also such instruments were launched but there were some pricing and tenure related problems that arose at that time and therefore this time all this is been handled with special attention. A person familiar with the development said, "This time, the pricing mechanism would be more realistic and the hedger would have different tenors to choose from."

The joint technical committee set up by SEBI and RBI to prepare the launch of currency futures is working on the interest rate futures as well. After the launch of interest rate futures, the committee is likely to work on currency futures. Chief Executive of Foreign Exchange Dealers' Association of India (FEDAI), R N Vadivelu feels that these instruments will be of ‘tremendous benefit' to both the corporates and people looking for opportunities to hedge currency and interest rate fluctuations. "After the policy makers finalize the framework of interest rate futures and swaps, currency options would be their next stop," he added.

According to market sources, the interest rate futures would help to spot the market scenario more accurately as these contracts will detect the interest rate in a better manner for corporates that have interest rate risk. Currently there are interest rate derivatives on notional T-bills and notional 10-year bonds floating in the market. These instruments are offered by National Stock Exchange (NSE) and there is absolutely no activity associated with them.

Interest rate futures contracts were first traded in October 1970 in the Chicago Board of Trade. In India they were introduced in 2003. RBI had started these instruments in the form of a notional 10-year zero coupon bond and a notional 90-day treasury bill. However they did not prove successful because of the huge price difference between spot and futures market.