A host of companies are aggressively hedging in the interest rate derivatives market to help shield themselves against volatility in interest rates. The companies, which are locking in current rates in the overnight indexed swap (OIS) market, include Reliance Industries, Adani Enterprises, National Bank for Financing Infrastructure and Development (NaBFID), Power Finance Corporation (PFC) and Rural Electrification Corporation (REC).
As a result, daily volumes in the interest rate derivative market have doubled, said sources familiar with the developments. A month ago, daily trade volumes in the 5-year OIS were around Rs 5,000 crore; this has now increased to Rs 9,000-10,000 crore.
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Companies use OIS contracts to protect themselves against potential fluctuations in short-term interest rates and helps reduce overall cost of funding. The OIS market allows participants to swap fixed and floating interest rates.
Corporates raise money by issuing bonds, but these bonds are usually unprotected against changes in interest rates, making them risky. To protect themselves from the negative impact of interest rate changes, they use the interest rate derivative market to hedge their risks. Moreover, the activity of these corporates have sharply increased in the total return swaps, a way to shield their liabilities against any volatility in the interest rate, said sources
Increasing presence of corporates in the interest rate derivative market has led to surge in volumes of five-year overnight indexed swap rate, a key borrowing benchmark. It has dropped about six basis points to 6.25% since the recent US presidential election, swap traders say. That is despite yields on 10-year treasuries, which often dictate movements in Indian swaps given the dominance of foreign banks in the local market, climbing 16 basis points during the period.
On a daily basis, NaBFID, PFC and REC have been receiving fixed rates in the OIS market to hedge against the falling rate, said a dealer with a private bank. Usually, they cover their positions on a portfolio basis with an average covering of around 50-70% of the amount of the bond issuance in the swap market.
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“Our aim is to create a balance between fixed and variable rate exposure,
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