The Reserve Bank of India (RBI) has issued new rules to strengthen the credit derivatives market. The focus of these rules is to improve the Indian corporate bond market and to facilitate financial institutions to better manage credit risk (RBI New Rules). RBI has taken this step after the government announced to promote this market in the budget.

After the implementation of the new rules, some categories of investors will now be allowed to use credit derivatives more easily than before. This may make it easier for companies to raise funds and is expected to increase liquidity in the financial market. RBI believes that this will also strengthen the Indian bond market.

Which investors got what rebate?

Under the new RBI rules, Indian resident non-retail users, such as banks, financial institutions and large companies, will now be able to use credit derivatives like Credit Default Swaps (CDS) and Total Return Swap (TRS) without any purpose restriction. This will help them manage their risks better.

At the same time, non-residential investors will be allowed to use these instruments only for hedging i.e. to protect their investments from possible losses. RBI has also made it clear that the same limits on the use of these products for retail investors will remain in place so that small investors do not have to face much risk.

What are the new rules?

RBI has said that retail residential users, except individual investors, will be able to use credit default swaps only for hedging purposes. Apart from this, payment for credit derivative deals done with non-resident investors can be made in both Indian rupees or foreign currency.

However, the central bank has not accepted the demand to allow credit derivatives on loans. RBI believes that doing so may increase unnecessary risk in the market. Therefore, at present such transactions have not been approved. This will help in maintaining transparency and financial discipline in the market.

What will be the impact on the market and economy?

Experts believe that the new rules will greatly benefit the Indian corporate bond market. Companies will be able to transfer their credit risk to another party in a better way, which will make it easier to issue bonds. With this, liquidity will increase in the market and investors will get new investment options.

Banks and other financial institutions will also be able to make their balance sheets more secure with the help of these resources. This will increase the strength of the entire financial foundation. This step will help in taking the Indian credit derivatives market closer to global standards. Also, the cost of raising funds for companies may reduce and investor confidence will also increase.