A Busy Interest Rate Futures Market Hints at a 25-bps Cut
Participates seek short-term gains expecting bond prices to go up after a cut by RBI
Mumbai: Open positions in the interest rate futures market, or the number of outstanding contracts, soared ahead of the Reserve Bank of India’s monetary policy statement on Wednesday, amid speculation of a quarter-point cut in the interest rate. Some investors, though, were sceptical about a rate reduction, given the ample liquidity and lower market interest rates.
“Using the RBI policy buzz, wealthy investors are betting on IRF as they seek short-term gains expecting bond prices to go up after an expected rate cut,” said Ajay Manglunia, executive VP (fixed income) at Edelweiss Finance. “But some institutional investors are short-selling futures as they at- tempt to hedge their arbitrage trades. Also, some individual investors are seen taking aggressive calls as they take a contrarian view of no-rate cut.”
For them, losses and gains — whatever be the outcome — are likely to be sharp, reflecting their higher risk appetite, needed for such bets.
Some private banks and bond houses are buying government securities from the spot cash market to earn close to 6.50% (benchmark bond yield) while they borrow funds from the collateralised borrowing and lending obligation market at about 6%. The same investors hedge their cash market positions in interest rate futures so that any sharp swings do not erode their investment.
The number of open interest contracts surged to 2,19,890 on February 6 from 1,53,299 six days earlier, an increase of 43%, according to preliminary data compiled by Edelweiss Finance, citing National Stock Exchange and BSE figures.
This has happened when prices are quoting at an average 7-8 paise discount to the spot rate, a sign that suggests investors are unsure of the future rate direction and are increasingly hedging their positions.