INTEREST RATE DERIVATIVE (IRD) MARKET

Interest-Rate Derivative:

• Meaning: An interest-rate derivative is a financial instrument with a value that increases and decreases based on movements in interest rates.
  
  
• Usage: Interest-rate derivatives are often used as hedges by institutional investors, banks, companies and individuals to protect themselves against changes in market interest rates, but they can also be used to increase or refine the holder's risk profile.
  
  

Interest-Rate Swap:

• An interest rate swap (IRS) is a type of Interest Rate Derivative (IRD).
  
  
• An interest rate swap is a contract between two counterparties who agree to exchange the future interest rate payments they make on loans or bonds. These two counterparties are banks, businesses, hedge funds, or investors.
  
  
• to RBI, rupee Interest Rate Swap (IRS) market is the most liquid among interest rate derivative markets.
  
  

Draft Norms:

• Features:
  • The draft norms have proposed non-resident Indians’ (NRIs) access to the IRD market, allowing them to hedge their rupee interest rate risk flexibly using any available IRD instrument.
    
    
  • NRIs will also be permitted to participate specifically in the overnight indexed swap (OIS) market for purposes other than hedging.
    
    
  
  
  
• Timeline: In its April 2018 policy, the RBI had proposed that NRIs should be given access to the rupee IRD market. Banks, market participants and other interested parties can comment on the draft guidelines by December 31.