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Rupee Interest Rate Derivatives

Reserve Bank of India (RBI) has issued directions on rupee interest rate derivatives.

What is Interest Rate Derivative (IRD)?

Interest Rate Derivative (IRD) means a financial derivative contract whose value is derived from one or more Rupee interest rates, prices of Rupee interest rate instruments, or Rupee interest rate indices.

To which transactions shall the directions be applicable?

  • The directions shall be applicable to Rupee IRD transactions undertaken in the over-the-counter (OTC) market and on recognised stock exchanges in India.
  • Forward Contracts in Government Securities shall be undertaken in the OTC market in terms of the Reserve Bank of India (Forward Contracts in Government Securities) Directions, 2025, dated February 21, 2025.

Who are eligible participants in IRD markets?

  • Resident
  • Non-resident, through its central treasury or its group entity, where applicable. 

What are the directions on trading of IRDs on recognised stock exchanges?

  • A recognised stock exchange is permitted to offer any standardised IRD product and the product design, eligible participants and other details of the IRD product may be finalised by the exchange. The exchange shall obtain prior approval of RBI before introducing any new IRD product or carrying out modifications to an existing product.
  • Any floating interest rate or price or index used in an exchange-traded IRD shall be a benchmark published by a Financial Benchmark Administrator (FBA).
  • A non-resident may transact in exchange-traded IRDs for the purpose of hedging. Hedging means the activity of undertaking a derivative transaction to reduce Rupee interest rate risk at the balance sheet level or the portfolio level or at individual asset or liability level.
  • Foreign Portfolio Investor (FPI) is permitted to purchase or sell Interest Rate Futures (IRFs) subject to the following conditions –
    • The aggregate long position of all FPIs, each of whom has a net long position in any IRF instrument, shall not exceed ₹5,000 crore, aggregated across all IRF instruments.
    • The total gross short (sold) position of any FPI shall not exceed its consolidated long position in Government securities and IRFs, at any point in time.
  • IRFs means a standardised IRD contract, traded on a recognised stock exchange, to buy or sell a notional security or any other interest-bearing instrument or an index of such instruments or interest rates at a specified future date, at a price determined at the time of the contract. IRFs include Money Market Futures (MMFs). 
  • MMFs means an interest rate future based on any rupee denominated money market interest rate or money market instrument.

Who are market makers for IRDs in OTC market?

  • Market-maker means an entity which provides prices to users and other market-makers. 
  • Market-makers need not have an underlying risk.
  • The following entities shall be eligible to act as market-makers in IRDs –
    • Scheduled Banks
    • Standalone Primary Dealers (SPDs)
    • Non-Banking Financial Companies – Upper Layer (NBFCs-UL)
    • Export-Import Bank of India (EXIM), National Bank for Agriculture and Rural Development (NABARD), National Housing Bank (NHB), Small Industries Development Bank of India (SIDBI) and National Bank for Financing Infrastructure and Development (NaBFID).
  • At least one of the parties to an IRD transaction shall be a market-maker or a central counterparty authorised by RBI for the purpose.

Who are users of IRDs in OTC market?

  • User refers to a person who undertakes derivative transactions other than as a market-maker.
  • A user shall be classified either as retail or non-retail.
  • The following shall be eligible to be classified as non-retail users –
    • An entity who is otherwise eligible to be a market maker.
    • NBFC (including HFC), other than a market-maker.
    • Insurance Company regulated by Insurance Regulatory and Development Authority of India (IRDAI).
    • Pension Fund regulated by Pension Fund Regulatory and Development Authority (PFRDA).
    • Mutual Fund regulated by Securities and Exchange Board of India (SEBI)
    • Alternative Investment Fund regulated by SEBI.
    • A resident with (a) minimum net worth of ₹500 crore; or (b) minimum turnover of ₹1,000 crore, as per the latest audited financial statements.
    • A non-resident, other than an individual.
    • A user who is otherwise eligible to be classified as a retail user, subject to the condition that the user makes a request in this regard to the market-maker and the market-maker is satisfied that the user has the risk management capabilities suitable for classification as a non-retail user.
  • Any user who is not eligible to be classified as a non-retail user shall be classified as a retail user.
  • Any user who is otherwise eligible to be classified as a non-retail user shall have the option to request the market-maker to get classified as a retail user.

Which IRD products can be offered to retail users in OTC market?

A market-maker may offer the following IRD products to retail users –

  • Forward rate agreement (FRA) – a cash-settled OTC derivative contract between two counterparties, in which a buyer will pay or receive, on the settlement date, the difference between a pre-determined fixed rate (FRA rate) and a predetermined floating interest rate / price / index, applied on a notional principal amount, for a specified forward period.
  • Interest rate swap – a derivative contract that involves exchange of a stream of agreed interest payments on a ‘notional principal’ amount during a specified period.
  • European interest rate call and put option, subject to the condition that retail user shall only buy these products.
    • Interest rate call / put option means an interest rate option that gives the buyer the right, but not the obligation, to buy / sell an interest rate instrument or receive / pay an interest rate on a notional principal at a pre-determined price / rate on or before a specified expiration date in the future.
    • European interest rate call / put option means an interest rate call / put option contract that can be exercised only on the expiration date.
  • Interest rate cap and interest rate floor, subject to the condition that retail user shall only buy these products. 
    • Interest rate cap means a series of interest rate call options (called caplets) in which the buyer of the option receives a payment at the end of each period when the underlying interest rate is above a rate agreed in advance (strike rate). 
    • Interest rate floor means a series of interest rate put options in which the buyer of the option receives a payment at the end of each period when the underlying interest rate is below the strike rate. 
  • Interest rate collar and reverse interest rate collar, subject to the condition that the retail user shall not be a net receiver of premium. 
    • Interest rate collar means a derivative contract where a market participant simultaneously purchases an interest rate cap and sells an interest rate floor on the same interest rate for the same maturity and notional principal amount. 
    • Reverse interest rate collar means a derivative contract which involves simultaneous purchase of an interest rate floor and sale of an interest rate cap on the same interest rate for the same maturity and notional principal amount.

Which IRD products can be offered to non-retail users in OTC market?

A market-maker may offer the following IRD products to non-retail users –

  • All products permitted to be offered to the retail users.
  • Interest rate swaption – an option on an interest rate swaps which gives the buyer the right, but not the obligation, to enter into an interest rate swap.
  • Any other IRD product, including derivatives having cash instruments and / or permitted derivatives as components but excluding leveraged derivatives and derivatives containing a derivative instrument as underlying. Leveraged derivative means an OTC derivative contract whose potential pay-out during the tenure of the contract can be more than the notional amount of the contract or whose pay-out calculation involves effective multiplication, by a factor of more than 1.0, of either the notional amount or the underlying interest rate / price / index.

Which IRD products can be offered to other users in OTC market?

  • A bank having an Authorised Dealer Category-I (AD Cat-I) license and an SPD authorised under section 10(1) of FEMA,1999, may offer Foreign Currency Settled Interest Rate Derivative (FCS-IRD) contracts to non-residents. These market-makers may also undertake transactions in FCS-IRD among themselves.
  • Scheduled Commercial Banks and SPDs authorised under section 10(1) of FEMA,1999, may offer transactions in IRDs based on the Modified Mumbai Interbank Forward Outright Rate (MMIFOR) to users. These market-makers may also undertake transactions in IRDs based on the MMIFOR among themselves.

What shall be the purpose of IRD transactions in OTC market?

  • A market-maker shall offer IRD products to a resident retail user (including a non-retail user who chooses to be classified as a retail user) and to a resident retail user classified as non-retail user, only for the purpose of hedging.
  • A market-maker may offer IRD products to a resident non-retail user (other than a retail user classified as a non-retail user) without any restriction in terms of purpose.
  • A market-maker may offer IRD products including FCS-IRD products to (a) non-resident individuals for the purpose of hedging and (b) non-residents, other than individuals, without any restriction in terms of purpose. 
  • Market-makers shall offer an IRD contract on Government Securities to a non-resident only for the purpose of hedging.
  • A market-maker shall offer IRD products based on MMIFOR to users only for the purpose of hedging.

What are the directions on transactions with non-residents in OTC market?

  • A market-maker may undertake IRD transactions, including FCS-IRD transactions with a non-resident directly or by way of a back-to-back arrangement for the purpose of hedging interest rate risk or otherwise, subject to the following –
    • The back-to-back arrangement may be put in place through an overseas entity (including overseas branches, IFSC Banking Units (IBUs), wholly owned subsidiaries or joint ventures of market-makers) provided that the overseas entity is eligible to deal with derivatives in the capacity of a dealer / market-maker as per the host jurisdiction laws and regulations.
    • The wholly owned subsidiary / joint venture of a market-maker incorporated in India may undertake such transactions provided the wholly owned subsidiary / joint venture is a banking entity.
  • Back-to-back arrangement means an arrangement under which an overseas entity (including overseas branches, IBUs, wholly owned subsidiaries or joint ventures of market-makers) undertakes a transaction with a non-resident and immediately enters into an off-setting transaction with the market-maker in India. In the case of foreign banks operating in India, the back-to-back arrangement may be through any branch of the parent bank.
  • IRD transactions, including transactions in FCS-IRD, by non-residents with market-makers undertaken for purposes other than hedging, shall be subject to an overall limit, as specified below –
    • Price Value of a Basis Point (PVBP) of all outstanding IRD positions, including FCS-IRD positions shall not exceed the amount of ₹1,000 crore (PVBP cap). 
    • Market-makers shall not offer any IRD / FCS-IRD to a non-resident for purposes other than hedging after the PVBP cap is reached.
    • CCIL shall monitor and publish the utilisation of the PVBP limit on a daily basis. CCIL shall also publish the methodology for calculation of the PVBP limit.
  • All payments related to IRD transactions of a non-resident, excluding FCS-IRD transactions, may be routed through an Indian Rupee (INR) account of the non-resident or, where the non-resident does not have an INR account in India, through a vostro account maintained with an AD bank in India. All payments related to FCS-IRD transactions may be routed through normal banking channels. 

What are other guidelines for transactions in OTC markets?

  • Any floating interest rate or price or index used in IRDs in OTC markets shall be a benchmark published by an FBA.
  • A market-maker undertaking an IRD transaction through a broker shall ensure that the broker has been accredited by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) for the purpose.
  • An IRD transaction shall be settled bilaterally or through any clearing arrangement approved by RBI for the purpose. An FCS-IRD transaction may also be settled as decided bilaterally by the counterparties.
  • A market participant may exit its position in IRDs by unwinding the position with the original counterparty or assigning the position to any other eligible market participants through novation subject to the condition that at least one of the parties to the novated IRD transaction shall be a market-maker.

From when shall the directions be applicable?

The directions shall come into force from March 01, 2026.


References

Reserve Bank of India. (2025, December 08). 'Master Direction – Reserve Bank of India (Rupee Interest Rate Derivatives) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=13214&Mode=0

Reserve Bank of India. (2025, December 08). 'RBI Issues Master Direction – Reserve Bank of India (Rupee Interest Rate Derivatives) Directions, 2025'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=61777


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