CDS should be linked to underlying exposure: RBI

Central bank will pursue policy of enhancing foreign investment in domestic financial markets in a gradual manner

The Reserve Bank of India (RBI) believes the credit default swaps (CDS) should be linked to underlying assets (loans or bonds).

In a presentation at the 15th Fixed Income Money Market and Derivatives Association of India - Primary Dealers' Association of India annual conference recently, RBI's Deputy Governor H R Khan called for linking CDS to underlying exposure. Besides, there should be limits on interest rate futures (IRF) positions.

The presentation also talked about the issue that liquidity in government securities market remained patchy, with trading concentrated in a few tenor points, especially at 10-year maturity, despite regular issuances across yield curve and state-of-the-art infrastructure in place.

The presentation also stressed on the fact that liquid debt markets are essential for both issuers and investors.

RBI would pursue the policy of enhancing foreign investment in domestic financial markets in a gradual manner and the focus would be on long-term investors, said the presentation by Khan.

Speaking on the recommendations of a committee on financial benchmarks, Khan said RBI was currently examining the recommendations for implementation. The committee has made a host of recommendations, including suggestions like financial benchmark calculation should be based on observable transactions subject to appropriate threshold.