The Hindu : Interest rate spread boosts profitability of PDs

Online edition of India's National Newspaper
Wednesday, Mar 31, 2004

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Business

Interest rate spread boosts profitability of PDs - Crisil

By Our Special Correspondent

MUMBAI, MARCH 30. The primary dealers (PDs) have made healthy trading gains from declining interest rates in recent years, as the price appreciation on their securities portfolio is inversely proportional to interest rates. What is less known, however, is that interest rate carry — the interest rate spread earned by PDs due to the difference between long-term and short-term interest rates - has also boosted their profitability.

Interest rate carry also acts as a cushion and would reduce the impact of an interest rate hike on a PD's portfolio. According to Krishnan Sitaraman, Head, Financial Sector Ratings, Crisil, "even if interest rates had gone up by up to 21 basis points on a 10-year security in FY 2002-03, and a PD had held the security throughout the year, it would still have been recorded positive overall profits due to the cushioning effect of interest rate carry.The introduction of structural measures like real time gross settlement (RTGS), delivery verses payment - III (DVP-III) and modifications to interest rate futures would lower interest rate risk, increase liquidity, deepen the debt markets and as a result favourably impact the credit profile of Primary Dealers (PDs), stated a study conducted by Crisil, leading domestic credit rating agency.

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