An Interest rate swap is a contractual agreement entered into between two counterparties under which each agrees to make periodic payment to the other for an agreed period of time based upon a notional amount of principal. The principal amount is notional and is required in order to compute the actual cash amounts that will be periodically exchanged.

Under the commonest form of interest rate swap, a series of payments calculated by applying a fixed rate of interest to a notional principal amount is exchanged for a stream of payments similarly calculated but using a floating rate of interest. This is a fixed-for-floating interest rate swap. Alternatively, both series of cash flows to be exchanged could be calculated using floating rates of interest but floating rates that are based upon different underlying indices. Examples might be the overnight interest rate (MIBOR) and commercial paper or Treasury bills and this form of interest rate swap is known as a basis or money market swap.

In India interest rate swaps are commonly traded on 2 benchmarks viz MIBOR and MIFOR.

(i) Overnight Index Swaps (OIS) : This swap consists of exchange of a fixed rate for the NSE MIBOR rate. The tenor of the swap may extend from 1 month to 10 years however the most actively traded swaps are for 1 year and 5 year maturity. The MIBOR rate is compounded daily and interest exchanges on the notional principal (generally Rs 25 crore) are exchanged half-yearly. The OIS swap rates track the underlying G-sec yields of relevant maturity. The market witnesses average daily volumes of Rs 6,000-Rs 8,000 crore and includes foreign banks, private sector, banks, primary dealers and few nationalized banks as the major participants.

(ii) MIFOR swaps : The MIFOR is another popular benchmark that has developed into a proxy for the AAA corporate funding cost in India. MIFOR is derived from USD Libor and the USD/INR Forward Premia and is simply the Indian equivalent of USD Libor and the USD Interest Rate Swaps market. MIFOR behaves like an interest rate benchmark and not a forex benchmark. There are a large number of Indian Corporates who now regularly use this benchmark to actively manage the interest rate risk on their debt portfolios, and access funding at better rates.

Interest Rate Futures


An Interest Rate Future is a futures contract with an interest-bearing instrument as the underlying asset. They are exchange traded instruments of a highly standardized nature as regards the contract size, maturity dates,etc. Interest rate futures were launched in India in June 2003 on the National Stock Exchange. Interest rate futures contracts were launched on Notional T- bills , Notional 10 year zero coupon bond and Notional 10 year coupon bearing bond with a minimum value of Rs. 2 lakhs.

The interest rate future contract had a period of maturity of one year with three months continuous contracts for the first three months and fixed quarterly contracts for the entire year. However this product failed to take off as the zero coupon yield model could not attractively track the movement in the G-sec market and provided an imperfect hedge. The Reserve Bank of India has proposed to introduce delivery based futures contracts with a basket of bonds available for delivery against the futures contract. This product is expected to be launched shortly.

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