Porus Mistry ‘s Updates : Interest Rate Swaps (IRS) in India

Interest Rate Swaps are nascent in India. The market deepened only after RBI allowed corporate

and mutual funds to participate in the market sometime in late 1999. Unfortunately the market has

not seen too much development and activity has been restricted between a handful of foreign and

private sector banks and a few large corporate. The shallowness of the market is also evident in the

wide prices that prevail in the market.

The major roadblock in development of the market has been inadequate benchmark floating rates.

Almost all the IRS deals that have been done till date have been benchmarked on overnight MIBOR

(Mumbai Overnight Borrowing Rate), released either by the NSE or Reuters, with the former being

more popular. This has effectively truncated the IRS market in India to that of an OIS (Overnight

Indexed Swap). Of late some swap deals have been reported in which longer term benchmarks have

been used like 90 day Reuters CP Rate (GE Capital) and 5 Year GOI Rate (IL & FS), but these deals

continue to remain sporadic in nature.

Porus Mistry ‘s Update : Regulations and Documentations for Interest Rate Swaps (IRS)

Regulations for transacting IRS are governed by the Reserve Bank of India.

Foremost, a company needs to have sanctioned lines from Institutions / Banks for transacting IRS.

(Given that IRS are low risk products due to netting conventions, Banks readily sanction such lines)

As far as risk hedging goes, only balance sheet risk can be hedged and the company has to provide

a declaration to that effect while transacting the product. The most important documentation for

conducting the IRS (or any derivative for that matter), is signing the ISDA (International Swap and

Derivatives Dealers Association).

This is a compendium of all the features of the transaction as its risk. The document also clearly

defines various terms that form a part of the transaction and defines the financial liabilities of

the transacting parties. While the ISDA is a standard document for any Institution, the document

typically carries an Annexure that is more specific about the financial liabilities and risk which are

peculiar to the transacting parties.

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