The Reserve Bank of India could introduce interest rate options in its busy season credit policy. This will enable banks to manage the interest risk on securities better. Banks have been looking for ways to make derivatives work.

Interest rate futures, which were introduced some months ago, failed to take off, as is evident from the lack of volumes. This is primarily because the zero-coupon yield curve was not favoured by the market, and seen to be unworkable. The market has been pushing the RBI for market-based solutions.

Options, like futures, are derivative products that give banks and primary dealers the right to buy and sell government securities to hedge their investment portfolio against interest rate movements. Futures, on the other hand, are fixed obligations to buy or sell at a certain date, at the prevailing interest rate.

The credit policy is likely to strengthen the structural framework for the interbank market. The RBI is expected to take forward the phasing out of non-banking participants from the interbank call money market and further slash limits on lending by mutual funds and financial institutions. At the same time, it is expected to develop the term money market, enabling non-banking players to park their funds.

For this, the sale of "repo-ed" securities is likely to be allowed so that securities lying idle from the date of repo to maturity can be put to use. This will help bring about better price discovery for every tenure of security.

The central bank is also likely to allow repos to be rolled over in order to generate greater volumes as well as to improve the market structure. It may also set varied rates for different tenures of repos.

The RBI may also unveil the final draft guidelines for the introduction of Separate Trading of Registered Interest and Principal of Securities. STRIPS splits the capital and interest portions of securities for sale to different types of investors.