Are derivatives in interest rates viable in India?
In the case of interest-rate risk, derivatives in India are hindered by the poor liquidity on the fixed-income market. However, a few approaches towards designing interest-rate derivatives could commence. An example of this would be a futures contracts on treasury bills, which would give people the ability to buy or sell treasury bills in the future. The lack of a liquid and transparent market for treasury bills, and constraints such as the inability to short-sell treasury bills, would hurt the ability to do arbitrage on this market. Hence, the market efficiency of the interest-rate futures market would be limited. However, in an environment where economic agents are exposed to interest-rate risk and have no alternative risk management facility, such contracts could still prove to be viable. If interest-rate futures came about, they would generate greater order flow and improve market quality on the fixed-income market.
