derivatives in India..!

Derivatives, which were the underlying cause behind this financial crisis ,are being embraced by India. Derivatives fulfil certain needs of the market i.e hedging economic exposure or speculating in commodity market. They enable market to achieve depth and ensure real price discovery.

RBI has recently come up with guidelines with regard to the introduction of credit default swaps(CDS) and currency futures in currencies like yen and euro . There was huge demand for such instruments by Indian business community to hedge risks on account of default on loans. Moreover, India's exports have increased substantially to Europe and Japan and there was a real need for futures in these currencies.

India reintroduced interest rates derivatives after a gap of 6 years . The interest rate futures which were first introduced in 2003 had failed to take off on account of design and pricing problems. It will help corporates to hedge risks associated with uncertainty in interest rates and increase liquidity in the bond market. However, our country has to go a long way before we develop a mature market in the derivatives segment. It requires a strong legal framework where contracts are honoured and an institutional set up to back the market participants.