How RBI has made it easier for one and all to hedge interest rate risks

By DK AggarwalThe fixed income market in India is experiencing an unprecedented transition. The central bank, RBI, has announced a policy for rupee interest rate derivatives (IRD) to promote more activity in this segment, which is being welcomed by both SMEs and stock exchanges.IRDs are among the most popular derivative instruments globally. To streamline the IRD segment in India, RBI on June 27, 2019 issued new directives to boost participation in hedging of interest rate risks and at the same time protect small and retail participants.So far, regulations in IRD had been issued separately for OTC (over-the-counter) segment and exchanges and the need for flexibility to structure cross-platform IRD products was the need of the hour. Banks usually provide structure solutions in IRD to large corporate and non-retail entities, but after the new RBI directive, even SMEs will have the advantage to hedge interest rate exposures, as their cost of hedging interest rate risk will come down with the arrival of structure products.RBI has directed market makers to offer IRD products, which include FRA (forward rate agreement), IRS (interest rate swap) and interest rate option to retail users to hedge interest rate risk. However, except overnight indexed swaps (OIS), the activity in these market has been thin and limited. Although non-retail users can take larger positions in this segment to enhance liquidity, which will help retail users substantially in price discovery. RBI is also trying to benchmark floating interest and IRD products in OTC segment, as published by FBA (Financial Benchmark Administrator) or approved by FIMMDA, which will bring more transparency to the repo market.RBI has put in a lot of efforts to facilitate NRI transactions in the inter-bank interest rate derivatives market in order to ensure liquidity in this segment. RBI has given NRIs the higher trading limit of $3.5 billion in overnight indexed swap (OIS), while the cap for foreign portfolio investors has been set at $7 billion.Most importantly, RBI’s revolutionary step will increase trading volumes on exchanges in interest rate derivatives, which has been otherwise a highly illiquid market as exchanges provide standardised contracts, which are not always useful in managing duration risks. Structured contracts will not only boost exchange volumes but also create a competitive market where participants will get another alternative over OTC platforms.70102903 Chairman and MD, SMC Investments and Advisors

from Economic Times https://ift.tt/324nKbs