Professional Documents
Culture Documents
Finnomics...
...where learning peaks!!!
We are back !!
(Re)interested in Futures!!!
We are back !!
We are back with a By: Priyanka Singhal, IB-1st year
bang!!
NSE launches IRF
In the ocean of fi-
nance if you feel like Trading in interest rate futures (IRFs) was relaunched in the coun-
a fish out of water or try on Monday; 31 August 2009 after a gap of over six years in a bid to
if you are an eager further deepen its financial markets and offer a hedging tool to small com-
beaver who wants to
more than scratch the panies and retail investors.
surface of finance,
Finance Forum brings Specifically, only one product - a Treasury bond future contract
all the news from the based on a notional 10-year government bond bearing 7% semi annual
board rooms right up coupon is being introduced. NSE has provided a list of 11 government se-
to your mail box
where you will have a curities maturing between 2018 and 2022 that are eligible for delivery and
chance to explore all for settling the contracts.
the avenues of fi-
nance with fun, frolic What are Interest rate Futures?
and excitement…All
this and much more
in a new avatar …. Interest rate futures are derivative contracts which have an interest
Here is the unraveling bearing security as the underlying instrument. It is "an agreement to buy
of our first edition of or sell a package of debt instruments at a specified future date at a price
that is fixed today... Contd on pg 2
FINNOMICS…
Editor: SBI since the last quarter is on a totally spree of cutting down
Shweta Vora its interest, creating much noise within the market. From Home Loans
(MMS-Fin) Interest Rates to Agricultural - Loans Interest Rates SBI has not left
any of these untouched. Following the request of Finance Minister
Pranab Mukherjee many banks have slashed their interest rates for
various sections of their business… Contd on pg 3
PAGE 2 FINNOMICS…
...WHERE LEARNING PE AKS!!!
Regulators had introduced IRFs in 2003 but they failed due to overly complex pricing system poor
product design and the RBI diktat banning banks, the biggest buyers of government securities from taking
trading positions. The earlier 2003 contract used a zero-coupon yield curve for determining the settlement
price, which was complex. All this led to the demise of this product.
Given that interest rate swaps are being widely used in the OTC market, experts feel that the intro-
duction of IRF will provide more opportunities for hedging against the interest rate risk. The question now
is whether trading will move away from swaps to futures. Experts feel that more people will now probably
hedge against risk arising out of interest rate fluctuations.
All in all the interest rate futures is a completely different market and therefore there will be the
possibility of being able to hedge positions through the futures market and more importantly it will create
arbitrage opportunities between the cash market, the OIS market and the interest rate futures market, which
in turn will bring in newer players as well.
PAGE 3 FINNOMICS…
...WHERE LEARNING PE AKS!!!
With improving liquidity conditions in the market, banks are trying their best to attract
home loans by reducing lending rates. Obviously, it is expected of SBI to take the lead. With
HDFC, AXIS bank and ICICI bank are offering home loans at 9.25% floating to new customers
and few other offering fixed rates for the first five years; as on 8th August 2009, SBI is offering a
rate of 8.00% for the first year for loans up to Rs. 30 Lacs and thereafter at rate of 8.50% for the
2nd and 3rd year. The consumer, thereafter, can decide between a floating rate thereafter at 2 per
cent below the bank's benchmark prime lending rate, the BPLR, prevalent at that time (current
BPLR is 11.75 per cent, so if it remains the same, the rate will be 9.75 per cent after three years).
The other option is to opt for a fixed rate after three years, for the fourth and fifth year at 1
per cent below the BPLR prevalent at that time. Competitors criticizing such a move state that if
the average interest payment made to SBI is considered it would be 9.35% as against 9.25% of-
fered by other banks. Deepak Parekh warned that such artificial lower rates could lead to a sub-
prime-like crisis. But with the introduction of fixed rate for three years, the SBI plan scores over
the other lenders who lend only on "floating rate" basis.
The car loan scheme from SBI is quite interesting. First, it cut the car loan rates in February
to 10 per cent for the first year and it was to be reset second year onwards. The recent scheme, an-
nounced on June 28, goes a step ahead. That is, the five-year new car loan scheme has a fixed rate
of interest for the first 3 years (8 per cent for the first year and 10 per cent for the next two years)
and at 0.5 per cent below BPLR for the fourth and fifth year (if the BPLR stays at current levels, it
will be at an effective rate of 11.25 per cent).
On 3rd September, SBI also launched a slew of measures for farm loan borrowers, including
interest rate reductions on irrigation and crop loans, to support drought-hit farmers. . The existing
rates in this category are 10.5 per cent to 13.25 per cent.
PAGE 4 FINNOMICS…
...WHERE LEARNING PE AKS!!!
Q. Everything moves in cycles…Is the same true with respect to interest rate futures?
A: Yes, definetely.The business cycle theory works here. However when the cycle starts and when it
ends cannot be predicted .The magnitude and duration which are difficult to forecast. However one of
the constraints is the time lag between the formulation of the policies and its implementation.
A: Partly, both . But in case of India due to the conservative approach of regulators we have not been
hit so hard in this crisis and therefore I have a staunch belief in conservatism.
Q. Yesterday being the anniversary of the great fall of Lehman, any learning’s for the market?
b.Whenever we are dealing with derivative products, it is very essential to be vigilant about the under-
lying asset.
d.Philosophically, anything in excess is bad. Therefore the risks should be taken moderately
Q. Recently the interest rate futures have been launched and the banks are allowed to participate unlike
earlier times. Your comment on it.
A: Introduction of banks as a player is justified as banks are one of the most important intermediaries
in India which leads to risk mitigation. This is a good product and it is beneficial for banks
Q. Sir, if you are appointed as the governor of RBI what kind of policies would you formulate?
A: I will take measures for controlling inflation because in India inflation is not only an economic phe-
nomenon but also a socio- political-economic issue. This can be implemented with the help of govern-
ment agencies like Law Enforcement Authority and Ministry of Finance.
A: Yes, definitely. It can be seen from the indicators like IIP numbers, monetary policy changes and
various schemes and bailout packages by the government.
A: Yes, as a parting note to my students I would like to say that: “Be a good human being first and
then you are everything else!”
PAGE 5 FINNOMICS…
...WHERE LEARNING PE AKS!!!
There are different interest rates that come under the purview of RBI. These interest rates are altered
by the RBI from time to time to assure smooth running of the economy. It is one of ways in which
inflation is controlled. Before understanding the effect of these interest rates on the economy we will
first understand the basic meaning of these rates.
Repo rate:
It is the rate at which banks borrow money from the RBI. This is done whenever the banks feel
the liquidity crunch. So an increase in repo rate can make it costly for the bank to borrow and a de-
crease in rate will encourage borrowing. This way people will feel less inclined to buy goods and ser-
vices thereby reducing the demand.
Conclusion:
Changes in interest rates are based on the country’s economic growth. Interest rates increases when
the economy is growing and there is demand for loans and decreases when economic activity slows
and few people are borrowing.
Whiz Quiz
th
Q.1, Who is the 5 General Director of WTO?
Q.2. An economic theory explaining the increase in interest rates due to rising government borrow-
ing in the money market is____.
Q.3. Who is the writer of the book – “The Upside of the Downturn”?
Q.4 This is a special purpose vehicle for Coal India, SAIL, NTPC, NMDC and RINL (Rashtriya Ispat
Nigam Ltd)….
The first 10 correct entries will get their names published in the next issue..Mail your answers at
financeforum@simsrites.com...Hurry!!