The Reserve Bank of India (RBI) released its Statement on Developmental and Regulatory Policies on February 6, 2026, outlining targeted measures to deepen India’s financial markets. These initiatives focus on bolstering the corporate bond market, enhancing foreign exchange (FX) flexibility for authorised dealers, and refining the Voluntary Retention Route (VRR) for foreign portfolio investors (FPIs). Aimed at improving liquidity, risk management, and ease of doing business, these reforms align with India’s push towards a more robust and globally competitive financial ecosystem.
Boosting the Corporate Bond Market through Derivatives
India’s corporate bond market has long grappled with liquidity challenges and limited participation across credit ratings. To address this, RBI is leveraging derivatives as a key enabler. An active derivatives market can streamline credit risk management, enhance market efficiency, and encourage bond issuances even from lower-rated corporates.
This momentum gained traction in the Union Budget speech on February 1, 2026, where the government announced the introduction of total return swaps (TRS) on corporate bonds and derivatives on corporate bond indices. TRS allows investors to gain exposure to bond returns without owning the underlying asset, while index derivatives enable hedging and speculation on bond portfolio performance.
RBI plans to issue a regulatory framework shortly for public feedback. This will cover product specifications, eligibility criteria, trading mechanisms, and risk safeguards. For banks and financial institutions, this development promises better tools for portfolio diversification and liquidity provision, potentially unlocking ₹ several lakh crores in untapped bond issuances. Market participants should monitor the consultation draft closely, as it could redefine fixed-income trading dynamics.
Enhanced Flexibility in Foreign Exchange Dealings for Authorised Dealers
Authorised Dealers (ADs)—comprising banks and standalone primary dealers under the Foreign Exchange Management Act (FEMA), 1999—play a pivotal role in FX market-making, balance sheet hedging, and risk mitigation. Recognising evolving domestic and global practices, RBI has reviewed and rationalised the existing framework to offer greater operational leeway.
Key refinements include expanded access to FX products, advanced risk management techniques, and diverse trading platforms. This could encompass permissions for exotic derivatives, algorithmic trading interfaces, and cross-currency hedging instruments tailored to current volatility trends.
Draft directions will be released soon for public consultation, inviting stakeholder inputs on implementation nuances. For ADs, these changes translate to reduced frictional costs, improved competitiveness against global peers, and stronger resilience in managing forex exposures amid rupee fluctuations. This is particularly timely as India’s FX reserves hover near record highs, underscoring the need for sophisticated market infrastructure.
Refinishing the Voluntary Retention Route for FPI Debt Investments
Introduced in March 2019, the VRR scheme encourages long-term FPI inflows into Indian debt markets by offering relaxed exit norms and investment incentives. With the ₹2.5 lakh crore limit over 80% utilised, demand has outpaced supply, prompting recalibrations for better predictability and usability.
RBI’s latest tweaks include two major shifts:
- Integration with General Route Limits: VRR investments will now count towards the broader FPI debt investment cap under the General Route, eliminating separate quotas. This ensures seamless allocation and reduces uncertainty over limit availability.
- Additional Operational Flexibilities: FPIs will gain eased norms on rebalancing, transfers, and compliance reporting, further streamlining participation.
Separate directions will follow to operationalise these changes. For the banking sector, this fosters deeper FPI engagement, stabilises G-sec yields, and supports government borrowing programmes. It also signals RBI’s commitment to ‘ease of doing business’ without compromising financial stability.
Implications for Banks and the Broader Ecosystem
These measures collectively aim to create a more liquid, inclusive, and investor-friendly financial markets landscape. Banks stand to benefit from enhanced hedging tools, FX agility, and increased FPI-driven debt market depth, ultimately aiding credit transmission and economic growth.
Stakeholders should prepare for the upcoming draft consultations by assessing internal readiness for new products and compliance updates. As RBI balances innovation with prudence, these reforms could position India’s financial markets as a global benchmark.
