‘RBI issues draft Rupee interest rate derivatives’

Published: 21st Sep, 2020

The Reserve Bank of India proposed allowing foreign portfolio investors (FPIs) to undertake exchange-traded rupee interest rate derivatives transactions subject to an overall ceiling of Rs 5,000 crore.

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What are Interest Rate Derivatives?

Interest Rate Derivatives (IRD) are contracts whose value is derived from one or more interest rates, prices of interest-rate instruments, or interest rate indices.
These may include interest rate futures, options, swaps, swaptions, and FRA's.
Entities with interest rate risk can use these derivatives to hedge or minimize potential losses that may accompany a change in interest rates.
The proposed Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2020 are aimed at-
- encouraging higher non-resident participation
- enhance the role of domestic market makers in the offshore market
- improve transparency
- achieve better regulatory oversight

Where FPIs will be allowed?

FPIsmay transact in permitted exchange-traded IRDs subject to the conditions that, at any point in time "the net long position of FPIs, collectively, and across all exchanges, in exchange-traded IRDs shall not exceed Rs 5,000 crore".
Also, the net short position of an FPI on exchange-traded IRDs should not exceed its long position in government securities and other rupee debt securities.

User classification:

For the purpose of offering Rupee IRD contracts to a user, the market-maker (entities which provide bid and offer prices to users in order to provide liquidity to the market) should classify the user either as a retail user or as a non-retail user.
- Non-retail users are entities regulated by RBI, SEBI, IRDAIor PFRDA; resident companies with a minimum net worth of Rs 500 crore; and non-residents, other than individuals.
- Any user who is not eligible to be classified as a non-retail user shall be classified as a retail user.

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‘RBI issues draft Rupee interest rate derivatives’