RBI Expands Credit Derivatives Market with Credit Index Derivatives and Total Return Swaps
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New Framework Broadens Risk Management Tools
The Reserve Bank of India (RBI) has unveiled a comprehensive overhaul of the country’s credit derivatives framework by introducing credit index derivatives and Total Return Swaps (TRS) on corporate bonds. The new Master Direction – Reserve Bank of India (Credit Derivatives) Directions, 2026 has come into immediate effect, replacing the earlier framework issued in 2022. The reforms are aimed at deepening India’s credit derivatives market, improving risk transfer mechanisms, and supporting the development of the corporate bond market.
More Instruments and Wider Market Participation
The revised framework significantly expands the range of products available to market participants. In addition to single-name Credit Default Swaps (CDS), the RBI has now permitted:
- Credit Default Swaps (CDS) on credit indices
- Futures on credit indices
- Total Return Swaps (TRS) on corporate bonds
A Total Return Swap enables one party to transfer both the credit and market risk of an underlying corporate bond to another party in exchange for periodic payments, offering institutions greater flexibility in managing their portfolios.
Boost for Liquidity and Corporate Bond Market
The RBI expects the expanded framework to improve liquidity, facilitate efficient credit risk transfer, and strengthen price discovery in India’s debt markets. Resident non-retail participants, including banks, financial institutions, insurance companies, mutual funds, pension funds, and other eligible institutional investors, will have greater flexibility to use credit derivatives without the earlier restrictions on purpose. However, non-resident participants will be permitted to use these instruments only for hedging purposes.
Supporting India’s Financial Market Development
The introduction of credit index derivatives and Total Return Swaps aligns with the RBI’s broader objective of developing deeper and more resilient financial markets. By expanding hedging options and improving access to sophisticated risk management tools, the central bank aims to make India’s corporate bond market more attractive to institutional investors while strengthening financial stability.
Market participants believe the revised framework marks a significant milestone in the evolution of India’s fixed-income markets, providing banks, investors, and financial institutions with modern instruments widely used in global financial markets.