Context: The Reserve Bank proposed allowing foreign portfolio investors (FPIs) to undertake exchange-traded rupee interest rate derivatives transactions subject to an overall ceiling of ₹5,000 crore.

Rationale behind the directions

The RBI aims to encourage 

  • higher non-resident participation, 
  • enhance the role of domestic market makers in the offshore market, 
  • improve transparency
  • achieve better regulatory oversight

Interest Rate Derivatives (IRDs) 

  • An interest rate derivative is a financial contract whose value is based on some underlying interest rate or interest-bearing asset.
  • These may include interest rate futures, options, swaps, swaptions, and FRA's.
  • Entities with interest rate risk can use these derivatives to hedge or minimize potential losses that may accompany a change in interest rate.
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