RBI issues final master directions on Rupee Interest Rate Derivatives: Key details explained

The Reserve Bank of India (RBI) has issued the master directions for Rupee Interest Rate Derivatives, officially titled as ‘Master Direction – Reserve Bank of India (Rupee Interest Rate Derivatives) Directions, 2025’.

The central bank issued the draft guidelines in June this year, inviting stakeholder feedback. “Based on the feedback received, the Directions have since been finalised and issued herewith,” the RBI said in the directions released on Monday, December 8.

According to the directions, both residents and non-residents will be permitted to engage in transactions involving interest-rate derivatives (IRDs) denominated in rupees. Non-residents can make IRD transactions through their central treasury or their group entity if it’s appropriately authorised by the user to deal for and on the user’s behalf. 

The directions include guidelines to establish a central framework for rupee IRD transactions, including eligibility criteria for participation and applicable limits.

The master direction will be implemented from March 1, 2026.

What are Rupee Interest Rate Derivatives?

Interest rate derivatives (IRDs) are financial contracts whose value is derived from movement in one or more interest rates. IRDs don’t involve actual loans; they’re just contracts whose value depends on interest rate movements.

Rupee IRDs are financial contracts in Indian Rupees (INR) whose value depends on underlying INR interest rates or instruments, like government bonds, Treasury Bills, etc.

In simple terms, rupee IRDS are financial contracts linked to Indian interest rates, which means their value goes up or down depending on how interest rates move in India.

Rupee IRDs include Interest Rate Swaps (IRS), Interest Rate Futures (IRF), Forward Rate Agreements (FRA), etc. They are based on Indian Rupee (INR) interest rates, like RBI policy rates, government bond yields or T-bill interest rates.

RBI Rupee Interest Rate Derivatives Directions: Key highlights

The master direction applies to rupee interest rate derivatives (IRD) transactions undertaken in the over-the-counter (OTC) market and on recognised stock exchanges in India.

Under the new framework, both resident and non-resident members are eligible to participate in IRD markets.

Non-residents shall make IRD transactions through their central treasury or their group entity, whenever applicable, according to the RBI Directions. “In case of such transactions, the market-maker shall ensure that the central treasury/ group entity is appropriately authorised by the user to deal for and on its behalf,” RBI said.

Market-makers are entities, like banks, non-banking financial companies (NBFCs), etc, that provide liquidity in financial markets by continuously quoting both buy and sell prices. They’re basically entities that are always ready to trade on either side.

As per the directions, market-makers may include scheduled banks, standalone primary dealers, upper-layer NBFCs and specified development or specialised banks (including Export-Import Bank of India, National Bank for Agriculture and Rural Development, National Housing Bank, Small Industries Development Bank of India and National Bank for Financing Infrastructure and Development).

Participants in the IRD market are classified as retail or non-retail users to determine the products they can access.

Many participants are classified as non-retail users, including market-makers, NBFCs (including HFCs) other than market-makers, insurance companies regulated by Insurance Regulatory and Development Authority of India (IRDAI), pension funds regulated by Pension Fund Regulatory and Development Authority (PFRDA), mutual funds regulated by SEBI, alternative investment funds regulated by SEBI, residents with a minimum net worth of ₹500 crore or a minimum turnover of ₹1,000 crore and non-residents.

Users who are classified as retail users can also request this in regard to the market-maker, and if the market-maker is satisfied that the user has the risk management capabilities suitable for classification as a non-retail user, the user can then be classified as a non-retail user.

Market-makers can offer specified, limited products to retail users, including Forward Rate Agreements, Interest Rate Swaps, caps, floors, etc.

Non-retail users can undertake a broader set of products, including swaptions and other complex derivatives.

A recognised stock exchange is permitted to offer any standardised IRD product, as per the directions. Eligible participants and other details of the IRD product may be finalised by the exchange, the rules state.

According to the master direction, market-makers have to be a part of every IRD transaction. Moreover, exchanges need to have prior RBI approval before introducing any new IRD products or making changes to existing ones.

“Any approval granted to a recognised stock exchange for introducing an IRD product prior to the issuance of these Directions shall be deemed to have been granted under these Directions,” as per the directions.

Non-residents can make IRD transactions without any purpose restrictions, including transactions in Foreign Currently Settled IRD (FCS-IRD). However, there is an overall limit:

“Price Value of a Basis Point (PVBP) of all outstanding IRD positions, including FCS-IRD positions, shall not exceed the amount of ₹1,000 crore (PVBP cap),” according to the master direction.

After the PVBP is hit, market-makers shall not offer any IRD or FCS-IRD to non-residents for purposes other than hedging.

“CCIL (Clearing Corporation of India Limited) shall monitor and publish the utilisation of the PVBP limit on a daily basis. CCIL shall also publish the methodology for calculation of the PVBP limit,” the directions state.

Overall, all IRD transactions and their details shall be reported to a trade repository within a specified time to ensure transparency and regulatory oversight.

“All IRD transactions (including client trades) undertaken by a market-maker, other than FCS-IRD transactions with non-residents and structured derivative transactions, shall be reported within 30 minutes of the transactions,” as per the master direction.

Further, all FCS-IRD transactions made by non-residents, directly or by way of a back-to-back arrangement, shall be reported before 12:00 (noon) of the following business day.

Additionally, all structured derivative transactions shall be reported before the closure of the TR of CCIL for the day.

The master direction aims to set standardised regulations for India’s rupee IRD markets and align the regulatory practices with evolving market situations.