RBI announces to add bond derivatives to investors' hedging toolkit

Feb 7, 2025

Reserve Bank of India Governor Sanjay Malhotra announced the plan in the authority's policy statement Friday

India’s central bank said it will allow trading in bond forwards, an instrument that could boost an existing $12 billion trade favored by long-term investors.

Reserve Bank of India Governor Sanjay Malhotra announced the plan in the authority’s policy statement Friday. The approval comes more than a year after the RBI sought feedback from investors on a draft proposal.

“Such forward contracts will enable long-term investors, such as insurance funds, to manage their interest rate risk across interest rate cycles,” Malhotra said.

Bond forwards allow investors to strike a deal to buy sovereign debt at a future date for a price struck at the time of the contract.

Pending official rules on bond forwards, investors such as insurance firms have been hedging their long-term liabilities through a similar instrument known as bond forward rate agreements. Insurers have sought to lock in fixed returns from bonds to offset their obligations, as more and more Indians opt for savings products.

The notional amount of bond FRA trades reported to the official clearing house totaled Rs 1.1 trillion ($12.2 billion), according to data available from March to January.

[Bloomberg]