The Hindu Business Line : Trading positions for banks in rate futures likely

Mumbai, March 3 Banks may be allowed to take trading positions in the interest rate futures market, if the recommendations of the Working Group on interest rate futures constituted by the Reserve Bank of India are accepted.

“Restricting banks’ participation only to hedging activities will impair the liquidity of the market.

Therefore, the Group recommends that banks be allowed to take trading positions in IRF subject to prudential regulations including capital requirements,” said the report, released by the RBI today.

Portfolio classification

Banks were allowed to classify their government securities portfolio held for the purpose of meeting SLR requirements as HTM as a risk mitigating measure.

The Group believes that the availability of IRFs as hedging instruments to manage interest rate risk will remedy this situation.

Repo efficiency

The report says that for the success of IRF, it would be necessary to improve the liquidity and efficiency of the repo market.

The Group suggests that FIIs may be allowed to take long position in the IRF market, subject to the condition that the total gross exposure in the cash and the IRF market does not exceed the extant maximum permissible cash market exposure limit which is currently $ 4.7 billion.

“They may also be allowed to take short position in IRF only to hedge exposure in the cash market up to the maximum permitted limit which is currently $ 4.7 billion,” the report said.

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