Context:
On June 17, 2025, the Reserve Bank of India (RBI) issued draft regulations for the Rupee Interest Rate Derivatives (IRD) market. The move aims to update and align the existing regulatory framework—last revised in June 2019—with evolving financial market dynamics, product innovation, and increased foreign participation.
Background
The 2019 IRD framework was a major milestone in streamlining derivative transactions linked to rupee interest rates. However, since then, the market has witnessed:
- The introduction of new derivative instruments
- A notable rise in non-resident participation
- Greater sophistication in hedging tools used by domestic entities
What Are Rupee Interest Rate Derivatives?
Interest Rate Derivatives are financial contracts whose value is derived from:
- One or more rupee interest rates
- The prices of instruments linked to rupee interest rates
- Indices measuring rupee interest rate trends
These tools are widely used by financial institutions, corporations, and investors to hedge interest rate risk or speculate on future movements in interest rates.
Key Objectives of the Draft Regulations
- Market Alignment: Update the framework to reflect current trading practices and instruments.
- Non-Resident Participation: Define clearer rules and access mechanisms for foreign investors and institutions.
- Risk Management: Encourage sound practices to manage counterparty, liquidity, and operational risks.
- Transparency & Oversight: Ensure all derivative transactions are properly recorded, reported, and supervised.
