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
Image Source: Livemint
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.