RBI gives go-ahead for forward contracts in Govt securities

Mumbai: The Reserve Bank Governor announced on Friday that the RBI will be introducing forward contracts in Government securities for which the directions will be issued shortly.

“We have been receiving feedback about the need to allow forward contracts in Government securities to enable further market development. Such forward contracts will enable long-term investors such as insurance funds to manage their interest rate risk across interest rate cycles. They will also enable efficient pricing of derivatives that use bonds as underlying instruments,” the RBI Governor said.

Over the past few years, the Reserve Bank has been expanding the suite of interest rate derivative products available to market participants to manage their interest rate risks. In addition to Interest Rate Swaps, products such as Interest Rate Options, Interest Rate Futures, Interest Rate Swaptions, Forward Rate Agreements, etc. are available to market participants.

Draft directions in this regard were issued in December 2023. The final directions, taking into account the public feedback, will be issued shortly, Malhotra added.

The Reserve Bank of India (RBI) on December 28 released the draft directions on bond forwards in government securities with an aim to expand interest rate derivative products in the market.

The draft directions on contracts to deliver government securities on a forward basis seek to enable market participants, especially long-term investors, to manage their cash flows and interest rate risk.

Comments on the draft directions were invited from banks, market participants, investors and other interested parties by January 25, 2024.

Malhotra also announced that the RBI has decided to allow SEBI-registered non-bank brokers access to NDS-OM on behalf of their clients.

He said that necessary instructions for implementing the move were being issued separately.

The Negotiated Dealing System – Order Matching (NDS-OM) is an electronic trading platform for secondary market transactions in government securities. Access to NDS-OM is, at present, available to regulated entities and to the clients of banks and standalone primary dealers.

–IANS