The Hindu Business Line : Bankers expect derivative biz to grow

Bankers expect their derivative business to grow by 20-25 per cent in the current fiscal as more and more Indian corporates are going for this financial tool to hedge their foreign exchange and interest rate risks.

According to bankers, as Indian companies are expanding their business overseas by mergers and acquisition, they are also exposed to various risks. "Helping them to hedge this risk is a growing business for banks," said an official with a bank whose derivative business registered a 20 per cent growth in the last six months.

Banks offer various derivative products. Products for hedging forex risk and interest rate risk or a combination of both are popular among corporates, said bankers. The value of derivative contracts depends on the values of one or more underlying assets (currencies, equities, commodities) or indices of asset values.

"Corporate interest in structured products and derivatives has been increasing because such products allow for risk management in the context of overall portfolios across various risk classes such as forex risk on exports, imports, assets and liabilities, and interest rates. Derivatives allow you to combine characteristics of several risk classes to customise a product to meet client needs," said Mr Ajay Mahajan, Group President-Financial Markets, Yes Bank.

The estimated volume in the interest rate swap rate market has gone up to Rs 5,25,053 crore during the eight months from April 2006 from about Rs 4,50,000 crore in 2005-06, according to a study by ICAP India Pvt Ltd, security firm.

What is driving this robust corporate demand for derivatives?

"As Indian corporates continue to expand by way of acquisitions and mergers, abroad and increase their exposure to imports and exports there is an increased need to manage the foreign exchange and interest rate risk arising due to this growth," said Mr Sundeep Bhandari, Managing Director, Head Global Markets South Asia, Standard Chartered Bank.

"With imports and exports growing at over 20 per cent, the need for managing such risk will also grow and, hence, we expect to see the business of forex and derivatives risk management grow at a similar pace. The growth in derivatives is quite sustainable," he said.

Not just corporate demand, even the need for long-term funds for infrastructure related projects has led to an increased demand for hedging products, said Mr C.E.S. Azariah, Chief Executive Officer, Fixed Income Money Market and Derivatives Association of India, which is trying to revive the interest rate futures market.

Foreign and large private banks have been active in the derivative market. However, according to bankers, more number of public sector banks are expected to enter the derivatives market. Banks also said that they are awaiting the RBI guidelines on derivatives, which is expected soon.

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