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Rupee Interest Rate Derivatives Market

The Reserve Bank of India (RBI) allowed non-residents to participate in the rupee interest rate derivatives market recently. This decision was taken with a view to deepening the rupee interest rate swap (IRS) market.

With this decision, non-residents of India can undertake rupee interest rate derivative transactions on recognised stock exchanges, electronic trading platforms and over the counter markets (OTCs).

RBI’s decision

  • A non-resident will be allowed to undertake transactions in the rupee interest rate derivatives markets to hedge an exposure to rupee interest rate risk and other specified purposes.
  • Foreign portfolio investors, collectively, can transact in interest rate futures up to a limit of net long position of Rs 5,000 crore.
  • RBI, in its first bi-monthly policy for 2018-19 in April, announced to provide access to non-residents into the interest rate swap market with a view to increase participation in the domestic market.

Why this move?

RBI stated that it had also observed that when rupee interest rate swap market was most liquid among the interest rate derivatives market, it lacked depth to enable large banks to manage risks. Also, Indian market has witnessed increasing participation from non-resident players like FPIs in debt.

What is an Interest-Rate Derivative?

An interest-rate derivative is a financial instrument with a value that increases and decreases based on movements in interest rates. Interest-rate derivatives are often used as hedges by institutional investors, banks, companies and individuals to protect themselves against changes in market interest rates, but they can also be used to increase or refine the holder’s risk profile.

What is interest rate swap?

An Interest Rate Swap (IRS) is a financial contract between two parties exchanging or swapping a stream of interest payments for a `notional principal’ amount on multiple occasions during a specified period. Such contracts generally involve exchange of a `fixed to floating’ or `floating to floating’ rates of interest. Accordingly, on each payment date – that occurs during the swap period – cash payments based on fixed/ floating and floating rates, are made by the parties to one another.

https://www.iasipstnpsc.in/rbi-can-transfer-rs-1-lakh-crore-of-excess-reserves-to-govt/

https://www.thehindubusinessline.com/money-and-banking/rbi-throws-open-rupee-interest-rate-derivatives-market-to-non-residents/article26655951.ece

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