RBI wants NRIs to participate in rupee interest rate derivatives

RBI has proposed to allow non-resident Indians to access rupee interest rate derivatives market and participate in overnight indexed swap market. This will provide hedging facility to NRIs and broad-base participation in the financial markets. 

An NRI can participate in rupee interest rate derivatives for hedge exposure to rupee interest rate risk. For this, non-resident may undertake any over-the-counter (OTC) interest rate derivative contract that is based on a domestic rupee benchmark interest rate administered by Financial Benchmarks India. He can contract any interest rate derivative on a recognised stock exchange and market makers shall ensure that transactions are being carried out for hedging.

Non-residents can also use it for non-hedging purposes. The foreign portfolio investors may take net long position in interest rate futures up to the limit of Rs 5,000 crore.  A non-resident may also undertake overnight indexed swaps (OIS) for any purpose other than hedging.

For this, the gross price value of basis point of all outstanding OIS transactions undertaken by all non-residents for purposes other than hedging shall not exceed the rupee equivalent amount of $50 million.

They should not undertake any further swaps after PVBP exceeds $50 million and the PVBP of outstanding OIS contracts for any non-resident shall not exceed 20 per cent of the PVBP cap.

“Permitting non-residents to hedge their rupee interest risk is a welcome move providing the much-needed fillip to the rupee interest rate derivative market. Allowing non-residents to participate in the OIS market for non-hedging purpose will also add depth to the market in terms of broad based participation,” said SBI chairman Rajnish Kumar.

The clearing corporation of India will publish the methodology for calculation of the PVBP and monitor as well as publish its utilisation on daily basis.

The policy has allowed NRIs to hedge their interest rate risks using onshore hedging products – this will deepen and enhance liquidity for popular products like the OIS (overnight index swaps),” said RK Gurumurthy, head treasury, Lakshmi Vilas Bank.

RBI has issued the draft direction for public feedback.