Finance Minister Jaswant Singh on Tuesday launched the trading of Interest Rate Futures in stock exchanges, which would enable banks, insurance companies and provident funds to hedge risks on interest rate fluctuations.

"Today's launch of interest rate derivatives is a milestone in our efforts to reform the capital market, provide scientific risk management and protect the interests of small investors," Singh said, launching the trade in the NSE.

As a first step, he launched the trading in futures on the 10-year government bond and 91-Treasury Bills, which would be available for a maximum maturity of one year.

"The products will be continuously refined and expanded based on market needs," he said.

Reserve Bank deputy governor Rakesh Mohan said that interest rate options would be introduced shortly after the regulatory mechanisms are put in place.

Interest Rate Derivatives - futures and options - are tools through which investors can manage volatility better and provides "insurance" to investors against unfriendly events.

With the introduction of IRDs, Singh said, "Our institutions will be at par with the international standards. It will also provide market protection to PFs, insurance companies, banks and corporates, which have long term liabilities that tend to be susceptible to volatility."

As the derivative trade opened up immense opportunities to FIs and individuals to manage interest rate exposure, Singh expressed confidence that the market would grow rapidly and constitute yet another "landmark" in building a vibrant financial market.

With today's launch, Singh said, "India would join the ranks of exchanges like CBOT, CME, Euroex and Euronext, which are the main exchanges in trading in derivative products."

Trading in MIBOR and other instruments are also in the pipeline. Necessary guidelines to launch these products and its trading by banks, primary dealers and mutual funds have been issued by RBI and SEBI.

Government earlier launched the retail trade in the government papers.

Asked whether the IRDs would reduce volatility in interest rates, Rakesh Mohan said, "It is not necessary that interest movement will be less but it will be feasible to hedge risks."

RBI executive director Usha Thorat said the IRDs would enable the apex bank to manage the government debt better. It would also help banks and primary dealers to widen the market by way of 2-way quoting of securities.

SEBI chairman G N Bajpai said the IRDs segment is expected to grow slowly and steadily.