RBI Issues Draft on Rupee Interest Rate (IR) Derivatives Directions 2020

Published: September 16, 2020

The Reserve Bank have proposed to allow foreign portfolio investors (FPIs) to undertake the rupee interest rate derivatives which is subject to a ceiling of ₹5,000 crore. These directions aim to encourage high non-resident participation, to enhance the role of domestic market makers in the other market, to improve transparency and to achieve better regulatory oversight.

What are Interest Rate Derivatives (IRDs)?

IRDs are the Financial Instruments whose value is linked to the movements of the interest rates through varying interest rates, prices of interest rate instruments, or interest rate indices. IRDs may include futures, options, or swaps contracts.  Interest rate derivatives are used as hedge by the institutional investors, banks, companies, and individuals so as to protect themselves against changes in market interest rates. Sometimes, IRDs are also be used to increase the holder’s risk profile or to speculate on rate moves.

Foreign Portfolio Investment (FPIs)

A foreign portfolio investment is the group of assets that include bonds, cash equivalents and stocks. Investments of the portfolios are held directly by an investor and are managed by financial professionals. Foreign portfolio investment is considered as entry of funds into a country where foreigners can deposit money in a country’s bank and make purchases in the country’s stock and bond markets.

Futures contracts or Futures

It is a legal agreement to buy or sell commodity or financial instruments at a predetermined price or the forward price and a specified time in the future. These agreements are done between parties who are not known to each other.

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