The Reserve Bank on 15th September 2020, proposed allowing foreign portfolio investors (FPIs) to undertake exchange-traded rupee interest rate derivatives transactions subject to an overall ceiling of ₹5,000 crore. Interest Rate Derivatives (IRD) are contracts whose value is derived from one or more interest rates, prices of interest rate instruments or interest rate indices.
The proposed Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2020 are aimed at encouraging higher non-resident participation, enhance the role of domestic market makers in the offshore market, improve transparency and achieve better regulatory oversight, according to the RBI.
FPIs may transact in permitted exchange-traded IRDs subject to the conditions that, at any point in time the net long position of FPIs, collectively, and across all exchanges, in exchange-traded IRDs shall not exceed ₹5,000 crore.
Also, the net short position of an FPI on exchange-traded IRDs should not exceed its long position in government securities and other rupee debt securities. The RBI has sought comment on the Draft Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2020 by 15th October 2020.
The draft further said for the purpose of offering Rupee IRD contracts to a user, the market-maker (entities which provide bid and offer prices to users in order to provide liquidity to the market) should classify the user either as a retail user or as a non-retail user. Non-retail users, as per the draft, are entities regulated by RBI, SEBI, IRDAI or PFRDA, resident companies with a minimum net worth of ₹500 crore and non-residents, other than individuals. Any user who is not eligible to be classified as a non-retail user shall be classified as a retail user.