RBI Issues Master Directions Allowing Residents and Non-Residents to Trade in Rupee Interest-Rate Derivatives

In a major regulatory move aimed at deepening India’s financial markets, the Reserve Bank of India (RBI) released master directions permitting both residents and non-residents to conduct transactions in rupee-denominated interest-rate derivatives (IRD).

These directions follow the draft guidelines issued in June and provide a comprehensive framework on participation, permissible instruments, position limits, reporting requirements, and risk disclosures. This marks a significant step in strengthening India’s derivative markets, improving liquidity, and offering better hedging tools to domestic and overseas participants.

Who Can Participate in Rupee IRD Trading?

The RBI has clearly outlined the categories of eligible participants:

Market Makers

Entities allowed to offer IRD products include:

• Scheduled commercial banks
• Standalone primary dealers (SPDs)
• Upper-layer NBFCs
• Development and specialised banks

These players can structure, quote, and manage derivative contracts for users.

Participants / Users

Users are classified into two categories:

• Retail users: Smaller participants that may use standardised products
• Non-retail users:

1. Institutional entities
2. NBFCs (other than market makers)
3. Corporates with treasury operations

Non-Resident Participation

Non-residents can participate directly or through:

• Their central treasury
• Group treasury entities, if the market maker is authorised to transact on their behalf

This creates flexibility for foreign investors while ensuring regulatory oversight.

Key Regulatory Limits for Non-Residents

To prevent excessive speculative activity, the RBI has imposed strict position limits.

PVBP Cap

The Price Value of a Basis Point (PVBP) on all outstanding non-resident positions must not exceed ₹1,000 crore.
Once this limit is reached:

• Fresh positions can be taken only for hedging purposes, not speculation.

Interest-Rate Derivatives Allowed & Exchange Rules

The framework applies to IRD transactions conducted:

• Over-the-counter (OTC)
• On recognised stock exchanges

Exchange-Traded Products

Exchanges must obtain RBI approval before introducing new IRD instruments.

Floating rates or indices used must be:

• Benchmarks published by an authorised financial benchmark administrator, ensuring transparency and accuracy.

Position Limits in Exchange-Traded Instruments

Non-resident limits have been clearly defined:

• Net long positions across all interest-rate futures cannot exceed ₹5,000 crore.
• Gross short positions cannot exceed consolidated long positions in government securities and futures.

These limits help maintain market stability and reduce systemic risk.

Reporting Requirements Strengthened

To improve transparency, the RBI has tightened reporting norms:

For Market Makers

• Must report global IRD transactions of their offshore-related parties
• Reporting is done through the central trade repository operated by the Clearing Corporation of India (CCIL)

For Stock Exchanges

Exchanges offering IRDs must:

• Submit detailed reports and documentation to RBI or designated agencies
• Provide risk disclosures to all users before they participate in the derivative market

This ensures informed participation and reduces potential mis-selling.

Settlement Rules for IRD Transactions

Payments and settlements for non-resident IRD transactions may be made through:

• Rupee accounts held in India
• Vostro accounts
• Foreign currency settlements via standard banking channels

These mechanisms maintain compliance with India’s foreign exchange regulations.