F&O in bonds? What?

1A market hiding in plain sight

On 4th Feb 2022 a reader went looking for bond futures and came back nearly empty handed:

Could anybody please throw some light on interest rate futures and options. I could not find a lot of information on that.

Hemant_Prasad, TradingQnA, 4th Feb 2022

He was not missing anything obvious. The market he was looking for lists contracts every day on NSE, right next to currency futures, and most traders never see it.

An interest rate future, or IRF, is a contract to buy or sell a government bond on a set date at a price fixed today. It works like a shopkeeper fixing the price of next month's sugar with his supplier today: whatever sugar costs next month, his price is settled.

Bond prices move with interest rates (chapter 5). When rates rise, prices fall, by about the bond's modified duration times the rise. So an IRF is a way to act on interest rates themselves. If you hold a bond, selling a future protects it from rising rates; that is called a hedge. If you think rates will fall, buying a future gains when they do, without buying the bond.

The chapter first tells the story of this market: how it was built, where its trading gathers, who is in it, and why so few people know it is there. Then it turns practical: how it compares with a Nifty future, how a contract works, what goes into its price, the numbers to watch, a worked hedge, a rate trade, and a checklist.

A bond future fixes today the price of a government bond on a later date. It lets you protect a bond from rising rates, or gain if rates fall, without buying the bond.

The market took 3 attempts to get its shape.

2Built for banks, 3 times

The first bond futures arrived on NSE in June 2003, on an imaginary "notional" bond. The RBI's rules let banks use them only to protect bonds they already held, never to take a view. In 2009 NSE tried again with a future on a notional 10 year bond, settled by handing over real bonds; on its first day banks did about a third of the trading, by NSE's account.

The third design, launched on 21st Jan 2014, is the one that lasted, and it is the simplest. Each contract sits on one real government bond, and it settles in cash: no bonds change hands, only the difference in price. Launch day drew ₹3,081 crore of trading, with 16 banks taking part, NSE reported. Since 2019 the RBI has let exchanges design these products themselves, with its approval for each one.

Bond futures were designed for banks and rebuilt 3 times. The version that lasted, from 2014, is simple: one real bond, settled in cash.

Simple design or not, the trading gathers in just one place.

3One contract, one benchmark

NSE lists futures and options on several government bonds at once, plus futures on a Treasury bill and on MIBOR, the overnight rate at which banks lend to each other. But on almost every day, nearly all the trading happens in a single contract: the nearest expiry of the future on the 10 year benchmark, the newest 10 year government bond and the same bond the cash market crowds into (chapter 8).

When the government issues a new 10 year bond, the market picks up and moves with it, like a baton passed down a relay team. Since 2019 the baton has gone from the 6.45% GS 2029 to the 5.77% GS 2030, the 6.10% GS 2031, the 7.26% GS 2033, the 7.10% GS 2034, and on to the 6.94% GS 2036 in August 2026.

Plate 9.1

The benchmark baton

The bond whose future held the most open interest, month by month, Dec 2019 to Oct 2026

For a newcomer this is good news. You do not need to study every contract. You need to find one, the benchmark's nearest expiry, because that is where the other side of your trade will be.

Nearly all bond futures trading sits in one contract, the nearest future on the 10 year benchmark, and moves to each new benchmark. Watch that one.

The next question is who is on the other side.

4Who is in the room

The traders in this market are mostly company treasuries managing their own interest rate risk, and brokers' own trading desks, according to SEBI's annual report. Banks, insurers and foreign investors, who own most of India's government bonds, barely use it.

The few large players give the market a rhythm. For most of the month it is quiet. In the last few days before each expiry it wakes up, as big positions are closed in the expiring month and reopened in the next, called rolling. In most years, about half or more of all the volume trades in those few days.

Plate 9.2

Quiet weeks, busy expiries

Futures lots traded each day, April to September 2025; dotted lines mark monthly expiry (last Thursday)

Company treasuries and brokers' own desks do most of the trading. The market is quiet for weeks and busy at each expiry, when big positions roll to the next month.

So why have so few retail traders joined them?

5Why so few people know about it

Little knowledge. There is almost nothing written about bond futures for retail investors. Hemant_Prasad's search in section 1 is the usual experience: a product page, an old circular, and silence.

No platform shows what matters. A bond trader thinks in yields, in the gap between the future and its bond, and in rupees per 0.01% move. Broker apps, Kite included, show a bond future like any other future: a price, the volume, the open interest and the market depth. A price like ₹97.04 on its own tells a newcomer almost nothing, so the contract looks dull and gets skipped. Section 10 shows what a screen built for bond traders would show.

It started as a bank's tool. For years the rules let banks use these futures only to protect bonds they held, and each redesign started over. The habit of trading them never formed among retail investors.

Trading draws trading. With activity in one contract, a newcomer who opens any other one finds it empty and concludes the whole market is dead.

Each of these is a gap, not a wall. Knowledge can be learned, the missing numbers can be worked out in one line, and the busy contract is easy to find.

Bond futures stayed small because few people know about them, no platform shows the numbers bond traders use, and they began as a bank's tool. All 3 are gaps a prepared retail investor can fill.

And the market is not standing still.

6A market waking up

Bond futures have had a big moment before. In early 2020 they traded tens of thousands of lots a day, and on 27th Feb 2020 the market turned over ₹4,682 crore in a single day. Then trading thinned out, and for 5 years it ran at a steady, quiet pace.

In 2026-27 it started to climb again. By mid October, the year's trading had already passed everything traded in the whole of 2025-26, and the ordinary day was several times busier than a year earlier.

Plate 9.3

7 years of bond futures, day by day

Average futures lots traded per day on NSE, by financial year; 1 lot = ₹2 lakh face value. Source: NSE

Bond futures boomed in early 2020, went quiet for 5 years, and in 2026-27 began to grow again.

For a trader who already knows Nifty futures, the case for a closer look is easy to see.

7Next to a Nifty future

The bond margin comes from NSE's margin rules: at least 1.5% of the contract value, with a risk based floor of 1.75% of the price, plus an extra 0.25%. At a price of ₹97, that is about ₹3,900 a lot. As a dated comparison, Zerodha's margin list of 27th Apr 2026 asked 11.3% for a Nifty future, and STT on futures sales rose to 0.05% from 1st Apr 2026; check Zerodha's charges page for today's figures.

Low margin is the attraction, and also the thing to respect. For a 10 year bond, a 0.25% rise in yields moves 1 lot by about ₹3,400, nearly the whole margin. Keep far more cash in the account than the minimum.

Next to a Nifty future, a bond future needs a fraction of the margin, pays no STT, trades longer and is taxed the same way. Its low margin means rate moves hit hard, so keep spare cash.

Here is what one contract actually is.

8Reading a contract

NSE's contract specification sets the rules:

Plate 9.4

Reading one bond futures contract

694GS2036, a future on the 6.94% GS 2036, as listed on NSE

General futures ideas, such as margin, leverage and closing a position early, work as they do for shares; Zerodha Varsity's module on futures trading covers them.

1 lot is ₹2 lakh face value of 1 named government bond, priced like the bond itself, settled in cash.

Before the numbers, the recipe behind the price.

9What goes into the price

Any future is priced from a simple question: what would it cost to buy the real thing today and hold it until expiry? Varsity's futures module calls this the cost of carry. A Nifty future and a bond future follow the same recipe, with one ingredient that tastes very different.

The difference is the third row. Someone holding Nifty shares until expiry pays interest on the money and collects only a sprinkle of dividends, so the Nifty future usually costs a little more than the index. Someone holding a government bond pays the same interest but earns coupon interest every day the bond is held, often more than the interest paid. The bond pays for its own keep, which is more than most house guests manage. So the bond future often sits a little below its bond. NSE's settlement page writes the same recipe in its own words: cash price plus financing cost minus income on the cash position.

A small example. Say borrowing costs 5.5% a year and the bond pays a 6.94% coupon. Holding the bond earns about 1.44% a year more than it costs, which over 2 weeks is roughly 6 paise on every ₹100. So, fairly priced, a future 2 weeks from expiry should sit about 6 paise below its bond. Section 10 shows how close they were on a real day.

What happens in a coupon month. A government bond pays its coupon on 2 fixed dates a year; the 6.94% GS 2036 pays on 11th May and 11th Nov. When a coupon falls before a future's expiry, the recipe already counts it: someone holding the real bond would receive it, so it is taken off the future's price in advance. The future holder never gets the coupon, and does not need to. Nothing dramatic happens on the day either. The future follows the bond's clean price, the price without accrued interest (chapter 4), and the clean price does not drop when a coupon is paid; only the accrued interest goes back to zero. If you watch the same bond on the exchange, where prices include accrued interest, you will see it drop by about the coupon around the record date. The future does not flinch. No cheque arrives, and it does not sulk about it.

A bond future is priced like any future: today's price, plus interest until expiry, minus what the holder earns. For a Nifty future that earning is small dividends; for a bond future it is the coupon, which is why it often sits below its bond. A coupon payment is priced in ahead of time and does not jolt the future.

With the recipe in hand, the numbers on the screen make sense.

10The screen a bond trader wants

Your broker app shows the October future on the 6.94% GS 2036 as a price, ₹97.04 when the market closed on 16th Oct 2026, with its volume and open interest. That is all. Here is the same contract on the same day, redrawn the way a bond trader reads it, with the yield put back in and the real bond beside it:

Plate 9.5

The screen a bond trader wants

The October future on the 6.94% GS 2036 at the close on 16th Oct 2026, with the yield put back in and the real bond beside it. Futures prices are NSE's daily settlement prices; bond prices from CCIL's NDS-OM and NSE's cash market

The top row puts the future's price next to the yield it implies, 7.38%. Beside it is the real bond on NDS-OM, the RBI's screen where banks trade: ₹97.02, also 7.38%, across 4,131 trades worth ₹43,175 crore that day, according to CCIL's NDS-OM market watch. The future and its bond were 2 paise apart, just as section 9's recipe expects.

The same bond also traded on NSE's cash market, where retail investors buy it (chapter 7), at ₹100.99. That looks like a different bond, but most of the difference is accrued interest: exchange prices include the interest earned since the last coupon (chapter 4), about ₹3.05 here. Take it out and the clean price is about ₹97.94, a yield of 7.24%. Retail buyers on the exchange were paying about ₹0.92 more than the banks on NDS-OM, on ₹52 lakh of trades against ₹43,175 crore.

TrapNSE's interest rate derivatives page also lists a "reference rate" for each bond. On 16th Oct 2026 it still showed ₹99.15 for this bond, a price weeks old, which would make the future look ₹2 cheap when it was not. Check the bond's price on CCIL's NDS-OM market watch instead.

The top row also shows what 1 lot is worth for each 0.01% move in yield, a basis point: about ₹133 here. That figure comes from chapter 5's rule, price change is about modified duration times the change in yield.

The yield chart shows the future's yield each day since the October contract became the busy one. It climbed from about 7.15% on 25th Sep to 7.42% on 14th Oct, then eased to 7.38%.

The P&L panel shows what that climb did to someone who bought 1 lot on 25th Sep at ₹98.55. Every day the yield rose, the price fell, and money left the buyer's account. By 16th Oct the buyer was down ₹3,020.

RememberYou buy the price, not the yield. When the yield line goes up, the price goes down, and the buyer of a bond future loses. A buyer is hoping for lower rates; a seller is hoping for higher ones.

When a gap does open. On expiry day the future is settled at the bond's real price on NDS-OM, so future and bond must meet. If the future ever drifts well away from its bond, that gap has to close by expiry. It can close with the future moving or with the bond moving, so a gap tells you the future is cheap or dear, not which way prices will go.

Read a bond future the way a bond trader does: its price and the yield inside it, the real bond on NDS-OM beside it, and about ₹133 a lot for each 0.01% move. You buy the price, not the yield, so a rising yield is a loss for the buyer.

Those same numbers are all you need to protect a bond.

11A worked hedge

First, what selling a future means when you have nothing to deliver. A bond future settles in cash. If you sell 1 lot at ₹98.58 and the price later falls to ₹98.00, you receive the difference, ₹0.58 on each of 2,000 units, ₹1,160. If the price rises instead, you pay the difference. Selling a future is simply a bet that the price will fall, settled in rupees. That is called a short position; buying one is a long position.

Now put it next to a bond you own. Your bond loses money when prices fall. A short future makes money when prices fall. Hold both, and one covers the other.

Take the benchmark at the time of writing. At the RBI's auction of 25th Sep 2026, the 6.94% GS 2036 sold at ₹98.58, a yield of 7.145%. Say you hold ₹10 lakh face value of it and might need to sell in a few months, so you want to protect its value until then.

Step 1: how much your bond moves. Its modified duration is about 6.7, so each 0.01% rise in yield cuts your ₹10 lakh holding by about ₹681.

Step 2: how much 1 lot moves. A lot is ₹2 lakh face value of the same bond, a fifth of your holding, so it moves about ₹136 for each 0.01%.

Step 3: how many lots. ₹681 divided by ₹136 is 5. Sell 5 lots. You will need about ₹20,000 as margin, plus spare cash.

Step 4: what happens, day by day. Every evening the exchange compares the future's price with the day before and moves the difference in cash, called the daily settlement. Here is a made up week:

Whatever yields do, the bond and the futures roughly cancel. Carry the same made up week on for 2 weeks and the picture looks like this:

Plate 9.6

Your bond, your futures, and the two together

₹10 lakh face value of the 6.94% GS 2036, hedged with 5 short lots of its future, over 10 trading days of made up yield moves

When you no longer need the protection, you buy back the 5 lots, and the hedge is over. If you still need it at expiry, you close the expiring month and sell the next one, which is the rolling from section 4.

TrapLook at Tuesday. Your bond gained ₹6,810, but only on paper, while ₹6,800 left your account in cash. A hedge needs spare cash for days like that.

Selling a future gains when prices fall, so it covers a bond you own. For ₹10 lakh of the 6.94% GS 2036, sell 5 lots; each day the futures' cash roughly cancels the bond's change.

You do not need to own a bond to use a future.

12A rate trade, and what options add

Buying a future. If you think interest rates will fall, perhaps because you expect the RBI to cut its policy rate at the next meeting, you can buy the benchmark future. When yields fall, bond prices rise, and so does your future. Say you buy 1 lot at ₹97.00:

• If yields fall 0.20%, the price rises about ₹1.35, and you gain about ₹2,700.
• If yields rise 0.20% instead, you lose about ₹2,700. That is about 70% of the ₹3,900 margin, gone in one move.

So decide before you buy how far against you that you will accept, say 0.10%, or about ₹1,350 a lot, and sell to close the trade if it gets there. The days most likely to move yields are known in advance (chapter 5): the RBI's policy announcements, the monthly inflation figure, the government's weekly bond auctions and its borrowing calendar.

Options. NSE also lists options on the same bonds, in the same ₹2 lakh lots. An option is a right, not a duty, and you pay a fee for it called the premium.

• A put is the right to sell at a set price, the strike. It works like insurance on a bond you own. Say you buy a put with a strike of ₹97 and pay ₹0.40 a unit, ₹800 a lot. If the price falls to ₹95 by expiry, the put pays ₹2 a unit, ₹4,000, and you are ₹3,200 ahead after the premium. If the price rises instead, the put pays nothing and you are out only the ₹800.
• A call is the right to buy at the strike. It suits a view that yields will fall: if the price rises above the strike, the call pays the difference; if not, you lose only the premium.

The prices in those examples are made up to show how the payoff works. In practice, options on bonds have traded far less than futures, so check that anyone is trading the one you want before relying on it. Varsity's options module explains options in full.

Buy a future if you expect yields to fall: about ₹135 a lot for each 0.01%, in either direction. A put protects a bond you own for the price of its premium; a call bets on falling yields with the loss capped.

Before the first order, run through the checklist.

13Before you trade: 8 checks

Trade the contract with open interest, know its yield and its gap to the bond, size it by rupees per 0.01%, mark the rate events before expiry, and keep spare cash.

To Hemant_Prasad: the information was scarce, but the market is real. NSE lists futures and options on named government bonds, ₹2 lakh face value a lot, settled in cash, and nearly all the trading sits in the future on the 10 year benchmark. Few people are looking at it, which is exactly why the numbers in section 10 are worth learning.

Where to find today's figures

Every figure in this chapter is dated. This is where to find the current one.