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Interest Rate Derivatives


An interest rate derivative is an instrument where the underlying asset is the right to pay or receive an (usually notional) amount of money at a given interest rate. In other words, interest rate derivatives are financial instruments based on an underlying financial security whose value is affected by interes rate changes. These products are used by a variety of participants in order to hedge their exposures against adverse interest rate movements. Such instruments are also used for speculation purposes, which broadly serve as an indicator for interest rate expectations. In India, the interest rate derivatives segment is at a growing stage. As of now, the interest rate derivatives permitted by regulatory guidelines in India include

 

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Consumer Price Index.
• The Consumer Price Index (Combined) inflation for April 2023 printed at 4.7%, significantly lower than the previous month’s reading of 5.7%.
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Wholesale Price Index
• Headline WPI inflation for April 2023 printed at -0.9%, lower than 1.3% in March 2023
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Index of Industrial Production
• IIP growth for March 2023 printed at 1.1%, significantly lower than the revised reading of 5.8% in February 2023, on a year-on-year basis.
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Gross Domestic Product
Real gross domestic product for Q3FY23 noted a growth of 4.4% on a year-on-year basis. Further, GDP grew by 3.6% on a quarter-on-quarter basis.
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Monetary Policy.
In the First Bi-monthly Monetary Policy for FY24, the MPC unanimously decided to maintain status quo on policy rates. Consequently, key policy rates stand unchanged: Repo rate at 6.50%, Standing Deposit Facility rate at 6.25% and Marginal Standing Facility and Bank rate at 6.75%.
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