Banks in India can offer foreign currency-settled rupee derivatives

Move is expected to remove segmentation between onshore and offshore markets

The Reserve Bank of India has allowed banks in India to offer the offshore Foreign Currency Settled Overnight Indexed Swap (FCS-OIS), helping to improve price discovery and deepen the interest rate derivatives market. This move is also expected to remove the segmentation between onshore and offshore markets.

The permission follows the beneficial outcome of allowing banks in June 2019 to offer Rupee interest rate derivatives to non-residents to hedge their interest rate risk. This initiative added to liquidity in the domestic OIS market, promoted diversity in participation and reduced the segmentation between the onshore and offshore markets, RBI said in the review of monetary policy.

Zarin Daruwala, Cluster Chief executive, India and South Asia markets, Standard Chartered Bank said opening up of the local currency Credit Default Swap (CDS) market and allowing domestic banks to participate in the FCS-OIS market are positive steps towards a more vibrant derivatives market. It will provide new hedging solutions for onshore participants.

Banks can enter into transactions with non-residents and market makers and participate through their branches in India, their foreign branches or through their IFSC Banking Units.

Venkat Nageswar Chalasani, currency and derivative market expert and former treasury executive at State Bank of India, said RBI is slowly opening up. Now banks in India can work as a one-stop shop to provide hedge for currency and interest rate exposures especially to those investing into India like Foreign Portfolio Investors (FPIs).

These swaps will be based on the Overnight Mumbai Interbank Outright Rate (MIBOR) benchmark. Banks may undertake FCSOIS transactions beyond onshore market hours.

Atul Kumar Goel, managing director and chief executive, Punjab National Bank said the participation in the FCS-OIS market will provide further fillip to the corporate bond and interest rate derivative market in the country.

In June 2019 decision Overseas entities were also permitted to undertake OIS transactions for purposes other than hedging with banks in India either directly or on a back-to-back basis through a foreign counterpart of the market-maker in India.