Interest rate futures is set to be relaunched with the joint initiative of the Reserve Bank of India, Securities and Exchange Board of India and Fixed Income and Money Market Dealers' Association of India.

According to banking sources, in all likelihood, the product will be relaunched before the ensuing monetary and credit policy in October.

"This time the endeavour is to make it acceptable to the market as a whole," the source said.

The relaunch is being undertaken by a working group which has already suggested to the RBI to permit banks to trade in futures.

Under the present structure, banks can only use the product to hedge their balance sheet requirement, while primary dealers are allowed to trade.

However, lack of adequate capital is hindering PDs from developing the product with two-way quotes as their risk taking capacity is limited. Banks with relatively huge capital, however, can take such risks.

Another crucial recommendation, which might come under consideration, is allowing the product to operate in fewer contracts and mainly in those underlying government papers and maturities in which the market is adequately liquid to generate greater volumes.

Such maturities and papers are being identified.

Besides, the working group is also deliberating on the use of benchmark for pricing of the product. Sources added the market might be allowed to use market yields for pricing the product as it is more comfortable with it.

This has become one of the most knotty issues as the RBI guidelines have asked the banks to use zero coupon yield curve as the benchmark.

Owing to the anomaly between prices on ZCYC and market traded yields, market participants found it difficult to price the products.