Background
The Reserve Bank of India (RBI) released its Master Directions on Rupee Interest Rate Derivatives (IRDs) on 8 December 2025.1 The direction covers the definitions, applicability, product types, permissibility of these products, purpose, regulatory reporting, and definition of preliminary limits of usage. While the directions are scheduled to come into effect from 1 March 2026, it is imperative for impacted stakeholders—including market makers, resident users, and non-resident users—to assess the implications and ensure timely readiness for compliance.
Key features of the master direction
- The regulatory guidelines lay the foundation for the coverage of IRDs across over the counter (OTC)–that is, bilateral derivative transactions and exchange-traded transactions on recognised stock exchanges in India.
- These products include interest rate swaps, interest rate futures, forward rate agreements, European interest rate options, caps, floors, and interest rate collars (including reverse collars).
- Non-residents are allowed to transact in exchange-traded IRDs (like futures) with the purpose of transaction strictly limited to hedging.
- Foreign portfolio investors (FPI) can enter into both long and short positions in interest rate futures with the net long position across all futures and FPIs to be limited to INR 5,000 crore.
- As the short positions in futures shall be undertaken by market participants primarily for the purpose of hedging their interest rate risk in government securities (G-Sec), the short position of any FPI in futures should not exceed its long position in G-Secs.
- For strong governance and risk management of retail usage of products with embedded optionality, retail users are only allowed to buy (or have a long position in) European interest rate call and put options, interest rate caps and floors, interest rate collars, and reverse interest rate collars.
- Following incidents of lapses in reporting of leveraged derivatives in mid-2025, the regulator has put in place safeguards to prohibit market makers from offering leveraged IRDs to both retail and non-retail users. Derivatives with another underlying derivative are also disallowed.
Our view on the master direction on IRDs
Participants in the rupee interest rate derivatives market
The inclusion of non-banking financial company (NBFC) – Upper Layer (NBFC-UL) as market makers enhances market depth and liquidity while providing income opportunities for well-governed NBFCs with strong risk management frameworks. The clear classification of participants—retail users as smaller players using products, and non-retail users as institutional entities, corporates, FPIs, non-residents, and NRIs primarily focused on hedging—enables tailored risk management. Overall, these changes promote broader, more inclusive IRD market participation, strengthen transparency through improved reporting and oversight, and support financial stability.
Stock exchanges vs OTC markets
Stock exchanges provide products to retail, institutional, non-resident users, and FPIs, mainly for hedging, under RBI approval and reporting rules.
OTC markets feature market makers such as scheduled banks, standalone primary dealers (SPDs), and NBFC-UL offering customised products to retail and non-retail users with prudential limits. Non-resident OTC participation, including FPIs, is tightly regulated.
Together, these markets offer a balanced mix of transparency, liquidity, flexibility, and customisation, supporting a strong IRD ecosystem.
Product offerings and user access across exchange-traded and OTC IRD markets
Exchange-traded products: Standardised instruments like interest rate futures and selected options are available to retail investors, institutions, FPIs, and non-residents, primarily for hedging. These venues offer transparency, liquidity, regulated trading hours, and typically follow standardised settlement cycles as prescribed by the exchange.
OTC products: Customised contracts such as interest rate swaps, forward rate agreements, caps, floors, collars, and structured derivatives are offered by market makers like scheduled banks, SPDs, and NBFC-UL to retail and non-retail users. OTC markets provide flexibility for tailored hedging and trading needs, with settlement timelines often determined bilaterally between counterparties or through approved clearing arrangements. This dual structure allows participants to choose products based on their risk profile, liquidity needs, and operational capability, fostering an inclusive, transparent, and resilient IRD market.
Benchmark usage and reporting framework for IRDs
IRDs in India use floating rates or indices published by Financial Benchmark Administrators (FBAs) authorised by the RBI, ensuring transparency, reliability, and regulatory oversight for pricing and settlement.
All OTC IRD transactions, including those involving clients, except for foreign currency-settled IRD (FCS-IRD) trades with non-residents and structured derivatives, must be reported to the Trade Repository (TR) of the Clearing Corporation of India Limited (CCIL) within 30 minutes after execution. FCS-IRD transactions with non-residents, whether conducted directly or through back-to-back arrangements, need to be reported by noon on the next business day. Meanwhile, structured derivative transactions are required to be reported before the TR’s close on the same trading day. This reporting framework, combined with RBI-approved benchmarks, enhances market integrity and participant confidence.
Collateral management across overseas branches and International Financial Services Centres (IFSC) banking units (Gujarat International Finance Tec-City [GIFT City])
Overseas branches and IFSC banking units of domestic market makers can enter into back-to-back arrangements if they follow risk management frameworks and comply with local laws. These arrangements must include proper one-to-one matching of transactions, implementation of robust trading practices, ongoing risk monitoring, and an effective system for collateral exchange.
Establishing a hedge effectiveness framework
With the hedge accounting guidelines already in place from the Institute of Chartered Accountants of India (ICAI) and Indian Accounting Standards (Ind AS), hedging transactions require entities to formulate a structure for maintaining an effective relationship between derivatives and underlying instruments (hedged item). This also includes having hedge documentation, qualitative and quantitative testing, and monitoring of counter-party credit risk.
Measuring and monitoring price value of a basis point (PVBP) sensitivities
The directions require monitoring of PVBP sensitivities for non-hedging IRD transactions with non-residents, imposing a hard PVBP cap of INR1,000 crore on all outstanding IRD/FCS-IRD positions. NRIs can transact IRDs mainly for hedging, with non-hedging activities limited by this PVBP cap. FPIs may trade interest rate futures within defined long and short position limits to ensure market stability. These measures balance foreign participation and market liquidity while safeguarding financial stability.
Regulatory framework and the Digital Personal Data Protection (DPDP) Law
The directions impose extensive reporting and disclosure obligations on market makers and participants, requiring detailed transaction data submission to the CCIL. This necessitates stringent compliance with the DPDP law, which governs data privacy and protection in India. Entities handling IRD transaction data must ensure secure data management, consent mechanisms, and data minimisation principles under the DPDP framework to prevent misuse and safeguard participant privacy.
KYC norms
The RBI’s 2025 directions stress robust KYC and AML due diligence for market participants in IRDs. They can rely on existing KYC documents to improve efficiency but may request additional information as needed. These measures enhance transparency, reduce fraud risk, and ensure only genuine participants enter the IRD market, aligning with broader financial regulations and reinforcing market integrity.
Impact on insurance and pension sectors
The directions explicitly recognise insurers and pension funds as non-retail, non-bank eligible users, granting them access to a wide range of IRD products for managing interest rate risk exposures. This regulatory clarity enables these sectors to strategically hedge liabilities arising from long-term insurance policies and pension obligations.
Contributors
Kuntal Sur, Tarun Saraf and Vikas Patil
Conclusion
Establishing a robust third-party risk management is essential for businesses as strengthening partnerships with vendors through transparency and accountability could ensure data integrity and security in the long run. Enterprises must take proactive steps to manage data privacy and third-party risk management. Safeguarding data isn't just a compliance issue–it’s essential to foster trust in the digital economy. Balancing innovation with strong privacy practices and stringent third-party oversight will be essential for long-term success in a data-driven world.
Sustainable digital growth thrives on finding the right balance between innovation and responsibility. By adopting a privacy first approach towards third-party risks, organisations can harness the value of data while safeguarding the rights and expectations of their stakeholders. By incorporating data privacy and third-party risk management into the very fabric of their operations, entities can not only demonstrate their compliance with the regulations but also position themselves as both resilient and responsible custodians of data. This unwavering commitment to transparency, accountability and security could build long-term customer relationships and help enhance the trust of the stakeholders in the organisation.
