Forward contracts in G-secs need ease of trading to take off
Reserve Bank of India's plan to introduce forward contracts in government bonds would depend on how trader-friendly the final rules are, in terms of permitting physical delivery, and transparency in the funding spread between short- and long-term derivative products, said experts.
The RBI after its Monetary Policy Committee meeting said on Friday that the central bank would include forward contracts in government securities so that long-term investors such as insurance funds can manage their interest rate risk. The RBI had released draft rules for bond forwards for the first time in December 2023.
Forwards are derivative contracts between two counterparties to buy and sell a specific security on a future date at a predetermined price. Trades between insurers — looking to lock in long-term returns — and foreign banks are being largely carried out in the form of a complex derivative called 'forward rate agreement' (FRA). FRAs are similar to bond forwards but do not have clear guidelines to regulate the product.
«What we would be looking for is more efficient and transparent pricing of the product in terms of funding spreads. Bond forwards would also enable physical delivery of bonds at a specified future date — meaning the transfer of a particular bond from the seller's book to the buyer's,» said Rahul Bhuskute, chief investment officer at Bharti AXA.
Until now, the bond FRA market has largely been driven by demand from insurance companies, which face the need to hedge their long-term liabilities. Expansion of the
