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Reserve Bank of India (RBI) | Securities and Exchange Board of India (SEBI) | Insurance Regulatory and Development Authority of India (IRDAI) | Pension Fund Regulatory and Development Authority (PFRDA)
The Reserve Bank of India (RBI) has issued the Master Direction - Reserve Bank of India (Rupee Interest Rate Derivatives) Directions, 2025, which consolidates and supersedes previous regulatory guidelines for the IRD market. These Directions, finalized after public consultation, will come into force on March 01, 2026. They are applicable to all Rupee IRD transactions undertaken in both the Over-the-Counter (OTC) market and on recognized stock exchanges in India.
Key Regulatory Framework Components:
Market Participants: The framework mandates a tiered, risk-based approach to participation.
Market Makers (entities that provide prices) include Scheduled Banks, Standalone Primary Dealers (SPDs), NBFC-Upper Layer (NBFC-UL), and specialized financial institutions (EXIM Bank, NABARD, etc.). At least one party in any OTC transaction must be a market maker.
User Classification: Users are classified as either Retail or Non-Retail for tailored risk control. Non-Retail classification is granted to regulated financial institutions (Insurance/Pension/Mutual Funds) and corporate residents meeting specific size thresholds (Net Worth >= ₹500 crore OR Turnover >= ₹1,000 crore) .
Risk-Based Product and Purpose Restrictions:
Retail Users: Can only participate in a limited menu of simple IRD products (e.g., Interest Rate Swaps, Caps, Floors, FRAs). Crucially, retail users are permitted to undertake IRD transactions only for the purpose of hedging their interest rate risk. They are only allowed to buy options, not sell them.
Non-Retail Users: Face no restrictions on the purpose of the transaction (i.e., can trade for speculation or arbitrage) and are permitted to use more complex products like Interest Rate Swaptions.
Non-Resident Participation:
Non-residents (other than individuals) are generally permitted to undertake IRD transactions, including Foreign Currency Settled IRDs (FCS-IRD), without restriction on purpose.
All non-resident transactions for non-hedging purposes are subject to an aggregate system-wide Price Value of a Basis Point (PVBP) cap of ₹1,000 crore to monitor and limit systemic exposure to global volatility.
Transparency and Reporting: All OTC IRD transactions must be reported by the market maker to the Trade Repository (TR) of the Clearing Corporation of India Ltd. (CCIL), with most client trades requiring reporting within 30 minutes of execution.
Policy Relevance
This Master Direction marks the completion of the RBI’s multi-year effort to modernize the framework for managing interest rate risk. The risk-based, tiered classification (Retail vs. Non-Retail) is essential for balancing capital market liberalization with investor protection. By mandating hedging for smaller market participants and providing the freedom to speculate for large, sophisticated entities, the RBI is deepening liquidity in the Rupee derivatives market while safeguarding households and smaller firms from the high risks associated with complex financial instruments. The strict PVBP cap on non-resident, non-hedging trades serves as a critical macro-prudential tool to shield India’s financial system from destabilizing short-term speculative capital flows.
Follow the full news here: Master Direction – Reserve Bank of India (Rupee Interest Rate Derivatives) Directions, 2025