RBI allows residents, non-residents to undertake rupee IRD transactions

New master directions allow residents and non-residents to trade rupee interest rate derivatives, with a PVBP limit of Rs 1,000 crore for foreign entities' speculative positions

Residents and non-residents will be permitted to do transactions in interest-rate derivatives (IRD) in rupees, according to master directions released on Monday by the Reserve Bank of India.

 

The central bank had released the draft guidelines in June this year.

 

The directions outline who can participate in this, how products may be introduced, and the limits applicable to foreign investors.

 

Non-residents can enter these trades through their central treasury or group entities if the market maker is authorised to transact on their behalf.

 

Market makers may include scheduled banks, standalone primary dealers, upper-layer non-banking financial companies (NBFCs), and specified development or specialised banks.

 

The directions require market makers to classify participants as retail or non-retail users. Non-retail users include NBFCs other than market makers and other institutional entities.

 

A cap of the price value of a basis point (PVBP) has been proposed for non-resident positions: The combined PVBP of all outstanding IRD trades by non-residents may not exceed ₹1,000 crore, after which fresh positions can only be taken for hedging.

 

The rules apply to IRD transactions in both the over-the-counter market and on recognised stock exchanges. Exchanges will be permitted to introduce any IRD product after approval from the Reserve Bank of India (RBI), and floating rates or indices used in exchange-traded products must be benchmarks published by an authorised financial benchmark administrator.

 

Reporting requirements have been tightened. Market makers will need to report global IRD transactions by their offshore-related parties to the central trade repository, operated by Clearing Corporation of India. Exchanges offering IRD products must submit reports and documentation to the RBI or designated agencies in the formats specified. Exchanges must also ensure that users are informed of the risks associated with IRD products before they enter the market.

 

Position limits have also been specified for non-residents in exchange-traded instruments. Foreign portfolio investors and other non-resident investors will not be allowed to hold net long positions exceeding ₹5,000 crore across all interest-rate futures. Gross short positions cannot exceed consolidated long positions in government securities and futures. For settlement, non-resident IRD transactions must be routed through rupee accounts in India or through vostro accounts, while foreign currency settled-IRD payments may be made through standard banking channels.