Bengaluru: The Reserve Bank of India (RBI) on Thursday issued final guidelines aimed at expanding India’s credit derivatives market, a move expected to deepen the country’s financial markets and improve risk management options for market participants.
The rules come after the Union Government proposed measures to strengthen and broaden the credit derivatives market in the Union Budget for 2026-27.
The new directions have come into force with immediate effect.
Wider use of credit derivatives permitted
Under the revised framework, resident Indian non-retail users will be allowed to use credit derivative instruments such as Credit Default Swap (CDS) and total return swaps without any restrictions on the purpose of their use.
The RBI said the move is intended to provide greater flexibility to eligible market participants in managing credit risks and improving market liquidity.
However, the central bank has adopted a more cautious approach towards overseas participants.
Non-resident users will be permitted to use these instruments only for hedging purposes, thereby restricting speculative activity involving Indian credit derivative products.
Restrictions for retail participants
The RBI has specified that retail resident users, except individual investors, may undertake credit default swaps only for hedging purposes.
The restriction is aimed at ensuring that retail participants use the instruments primarily for risk management rather than speculative trading.
The central bank has also rejected a proposal seeking permission to introduce credit derivatives on loans.
Market participants had sought broader applicability of credit derivatives, including their use on loan exposures, but the RBI decided not to permit such products under the final framework.
Settlement in rupees or foreign currency
The new directions also provide flexibility in the settlement mechanism for contracts involving non-residents.
According to the RBI, credit derivative contracts with non-resident participants may be settled either in Indian rupees or in a foreign currency.
The provision is expected to facilitate greater participation by foreign entities while maintaining regulatory oversight of the market.
Boost to financial market development
Credit derivatives are financial instruments that enable investors and institutions to transfer or manage credit risk associated with loans, bonds and other debt instruments.
Financial experts believe that a deeper and more liquid credit derivatives market can improve price discovery, strengthen risk management practices and enhance the resilience of the financial system.
The government’s push to expand the market is also aimed at attracting greater participation from institutional investors and improving the efficiency of India’s debt markets.
The issuance of the final rules marks another step in the RBI’s efforts to modernise and deepen India’s financial markets while ensuring that adequate safeguards remain in place to preserve financial stability.
Market participants are expected to study the new framework closely and assess its impact on credit risk management and investment strategies in the coming months.