RBI Permits Small Finance Banks to Expand Hedging Avenues with Rupee Interest Rate Derivatives

In a move to bolster the risk management capabilities of Small Finance Banks (SFBs), the Reserve Bank of India (RBI) has announced a significant policy shift. Effective immediately, SFBs are now authorized to utilize permissible rupee interest rate derivative products for hedging purposes, in terms of the Rupee Interest Rate Derivatives (Reserve Bank) Directions, 2019.


This decision marks a departure from the previous restriction which confined SFBs to employing Interest Rate Futures (IRFs) solely for proprietary hedging. By broadening the spectrum of permissible instruments, the RBI aims to enhance the efficacy of interest rate risk management across the balance sheets and commercial operations of SFBs.


The implications of this regulatory update extend beyond the operational realm of SFBs. By permitting SFBs to engage in rupee interest rate derivative products, the RBI anticipates a surge in liquidity within the overnight interest swap (OIS) market. Furthermore, this measure is poised to fortify the resilience of SFBs’ balance sheets, thereby fostering greater stability within the financial ecosystem.


This circular is applicable to all Small Finance Banks. With immediate effect, SFBs are empowered to harness the full spectrum of permissible rupee interest rate derivative products, marking a pivotal moment in their risk management strategies.