The Reserve Bank of India (RBI) has issued its final Master Directions for expanding the country's credit derivatives market, effective June 25, 2026. The new rules permit wider use of instruments such as Credit Default Swaps (CDS) and total return swaps, marking a significant step in deepening India's financial markets.
Key changes for market participants
Under the final directions, resident Indian non-retail users can deploy CDS and total return swaps without any restrictions on purpose. In contrast, non-resident users are limited to using these instruments solely for hedging. Retail resident users, excluding individuals, may only buy protection for hedging purposes, as per the RBI statement.
The central bank also clarified that credit derivative contracts with non-residents may be settled in Indian rupees or a foreign currency. Insurance companies, pension funds, mutual funds, alternative investment funds (AIFs), and foreign portfolio investors (FPIs) are now eligible to act as protection sellers.
Background and regulatory process
The move follows proposals in the Union Budget 2026 to deepen India's credit derivatives market and strengthen risk management tools. The RBI had previously issued draft directions and sought public feedback. “The feedback received on the draft directions has been examined and consequent modifications have been suitably incorporated in the final Master Directions,” the RBI stated.
The new rules are applicable with immediate effect, with the directions coming into force on June 25, 2026.
Exchange-traded credit derivatives
For exchange-traded credit derivatives, exchanges may offer standardised single-name CDS contracts and CDS contracts on credit indices with guaranteed settlement. However, before launching any CDS product, exchanges must obtain RBI approval for product design, changes in product design, eligible participants, and other details of CDS contracts.
The RBI is also permitting FPIs to trade credit index futures, but with safeguards to prevent excessive speculation. For instance, FPIs cannot take excessive short (sell) positions and cannot trade credit index futures linked to very short-term debt instruments.
Impact on financial markets
By expanding the credit derivatives market, the RBI aims to provide better risk management tools for market participants and enhance liquidity in the corporate bond market. The inclusion of FPIs as protection sellers is expected to attract foreign capital and improve price discovery. The final directions are seen as a balanced approach, allowing wider participation while imposing restrictions to curb speculative risks.
