Reserve Bank of India issues norms for forward contracts in G-secs

Aims to assist long-term investors in managing cash flows

The Reserve Bank of India (RBI) today released norms for forward contracts in government securities (G-secs) to enable market participants, especially long-term investors, to manage their cash flows and interest rate risk. These directions for forward contracts, or bond forwards, undertaken in the Over-the-Counter (OTC) market in India, will come into force with effect from May 2, 2025, RBI said in a notification.

 

The central bank had issued a draft notification in December 2023. RBI has been expanding the suite of interest rate derivative products available to market participants to manage interest rate risks.

 

For the purpose of entering into deals, a bond forward refers to a rupee interest rate derivative contract in which one counterparty (buyer) agrees to buy a specific government security (G-sec) from another counterparty (seller). The contract specifies a future date and a price determined at the time of the contract.

 

A resident and a non-resident who is eligible to invest in government securities under the Foreign Exchange Management (Debt Instruments) Regulations, 2019, can participate in such transactions. Any entity eligible to be classified as a non-retail user shall be eligible to undertake transactions in bond forwards as a user, RBI said.

 

Scheduled commercial banks and standalone primary dealers can act as market makers for bond forwards. However, small finance banks, payment banks, local area banks, and regional rural banks are excluded from the category of players allowed to engage in market-making.

 

A market-maker may undertake long positions without any limit and covered short positions in bond forwards. A market-maker permitted to undertake short sales will also be eligible to undertake uncovered short positions, but only when the underlying government security is also eligible for short sale.

 

At least one of the parties to a bond forward transaction should be a market-maker or a central counterparty authorised for the purpose, RBI added.