With an aim to facilitate further market development and to ensure Foreign Portfolio Investors (FPIs) access to futures remains uninterrupted, the Reserve Bank of India (RBI) has proposed to allocate FPIs a separate limit of Rs 5,000 crore for long position in Interest Rate Futures (IRFs).
At present, the FPI limit for government securities is fungible between investments in securities and investment in bond futures. The limits prescribed for investment by FPIs in Government securities will then be exclusively available for acquiring such securities. FPI’s access to interest rate futures for hedging purposes will continue as before. The circular in this regard would be issued by the RBI after consultation with the government.
An IRF is a contract between a buyer and a seller agreeing to the future delivery of any interest-bearing asset such as government bonds. The cash-settled IRFs provides market participants with a better option to hedge risks arising from fluctuations in interest rates, which depend on various factors including RBI policy, demand for liquidity and flow of overseas funds. Banks, primary dealers, mutual funds, insurers, FIIs, corporates and brokers, as well as retail investors trade in this product.