Corporate bond market and equity market is interlinked , for when there is a bad news about the company the share prices goes down and the corporate bond prices goes down. The corporate bond market is also deeply linked to the government bonds market if the interest rate goes up bond prices of both the market goes down. Currency spot and derivative market of the world are also connected with the India bond market.
In India it’s been treated differently and had failed. In order to achieve progress critical requirement is to make perspective of the Bond currency derivatives market seamless.
In 1999 RBI took the initiative and introduced over the counter interest rate derivatives, like interest rate swaps (IRS), Forward rate agreement (FRA). As the success rate was impressive NSE introduced in 2003 exchange traded interest rate futures contracts. These product ab initio, failed to attract a critical mass of participants and transactions as there was deficiency in the product design of the future contract and then there was no trading thereafter.
For the development of domestic finance and to achieve revenues in exports the bond and currency derivatives is an important for the Indian financial sector policy. In respect a report on the working of interest rate futures by RBI committee submitted in the month of March 2008 on both interest rate future (IRS) and currency futures in 2008.Interest rate future is a future contract with an interest bearing instrument as the underlying asset. Currency future is a future contract to exchange one currency for another at a specified date in the future at a price that is fixed on purchase date.
The committee came out with some revolutionary steps & Currency future went live:-
- The banks should be allowed to take trading positions in the IRF which will be subject to prudential regulations including the capital requirements.
- The time limit on short selling is extended so that maturity of the short sale is co-terminus with that of future contract.
- For the success of IRF they recommend improve the liquidity and efficiency in the repo market.
- FII should be allowed to take long positions in the IRF market and revised the limit up to USD 4.7 billion. Some amendments have been mad in this regard.
- To begin with one IRF contract based on notional, coupon bearing, 10 year GOI security to be introduced in the future segment.
For the development of India it is mandatory to have a very sound bond market in order to finance the debt requirement of the infrastructure projects, corporations and the government. The problem with India is that its financial sector policy traditionally worked upon the principle of ‘divide and conquer’. This strategy has been the reason for the failure of financial sector policy over decades.