By Dharamraj Dhutia
MUMBAI (Reuters) – The Reserve Bank of India is set to allow trading in bond forwards that long-term investors can use to manage their interest rate risk, the central bank said on Friday.
“We have been receiving feedback about the need to allow forward contracts in government securities to enable further market development,” RBI Governor Sanjay Malhotra said while announcing his first-ever monetary policy decision.
“Such forward contracts will enable long-term investors such as insurance funds to manage their interest rate risk across interest rate cycles. They will also enable efficient pricing of derivatives that use bonds as underlying instruments.”
Bond forwards allow investors to buy government securities at a future date at a price that is determined at the time of entering into the contract.
The final guidelines for these contracts would be announced shortly, the RBI said.
“This is a welcome move from a life insurance perspective as it will allow us to more efficiently hedge interest rate risks,” said Prasun Gajri, chief investment officer at HDFC Life Insurance.
Currently, insurance companies use forward rate agreements to hedge their interest rate risks.
The central bank also said it will form a working group with representation from various stakeholders to review trading and settlement timings of financial markets regulated by the RBI. The group is expected to submit its report by April 30.
(Reporting by Dharamraj Dhutia; Editing by Mrigank Dhaniwala)
