The Reserve Bank of India (RBI) has released the final guidelines aimed at expanding the country’s credit derivatives market, allowing broader participation and greater use of instruments such as Credit Default Swaps (CDS) and total return swaps. The central bank announced the move on Thursday, with the new framework coming into effect immediately from June 25, 2026. The development follows the government’s proposal in the Union Budget 2026 to strengthen India’s credit derivatives ecosystem and provide market participants with better tools for managing credit risks.

Under the new rules, resident non-retail users will be permitted to use credit derivative instruments, including CDS and total return swaps, without restrictions on their purpose. However, non-resident participants will be allowed to use these instruments mainly for hedging activities. For resident retail users, excluding individuals, CDS transactions will be permitted only for risk protection purposes. The RBI clarified that such users can purchase credit protection only to hedge their existing exposure.

The updated framework also allows credit derivative contracts involving non-residents to be settled either in Indian rupees or foreign currency, depending on the terms of the agreement. The RBI has expanded the list of eligible participants who can act as protection sellers. Insurance companies, pension funds, mutual funds, Alternative Investment Funds (AIFs), and Foreign Portfolio Investors (FPIs) will now be allowed to sell credit protection under the revised guidelines.

The central bank said it reviewed the draft directions after receiving feedback from stakeholders and incorporated necessary changes into the final Master Directions. Regarding exchange-traded credit derivatives, the RBI stated that stock exchanges will be allowed to introduce standardised single-name CDS contracts and credit index-based CDS products with guaranteed settlement mechanisms. However, exchanges will need prior approval from the RBI before launching any such product, including approval for contract design, eligible participants, and other related features.

The new rules also permit FPIs to participate in credit index futures trading, but with certain safeguards to prevent excessive speculation. FPIs will not be allowed to build large short positions or trade credit index futures linked to very short-term debt instruments. The RBI’s move is expected to improve risk management options for financial institutions, increase market depth, and support the development of a more advanced credit derivatives market in India.