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

The Economic Times - - Companies: Pursuit Of Profit -

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.

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