RBI to roll out framework for corporate bond derivatives and total return swaps after Budget push

The Reserve Bank of India said on Thursday it would soon issue a regulatory framework for derivatives on corporate bond indices and total return swaps (TRS) on corporate bonds, moving ahead with a key announcement made in Union Budget 2026-27 on deepening the country’s corporate debt market.

In a statement, the central bank said an active derivatives market could help investors manage credit risk more efficiently, improve liquidity and pricing efficiency, and facilitate the issuance of corporate bonds across the rating spectrum. The proposed framework for credit index derivatives and TRS will be released shortly for public feedback, it said.

In her Budget speech on 1 February, finance minister Nirmala Sitharaman announced plans to introduce total return swaps on corporate bonds as well as derivatives on corporate bond indices, as well as incentives to encourage larger municipal bond issuances.

TRS allows investors to gain the full economic exposure of a bond, including coupon payments and price movements, without owning the bond itself. Under this structure, a bank or intermediary holds the bond on its balance sheet and passes on the total return to the investor in exchange for a funding cost and margin. In return, the investor takes on the risk of loss. If the asset’s price falls, they must pay the difference to the original owner.

While similar structures are widely used in overseas government bond markets and selectively by offshore investors in Indian debt, officials cautioned that TRS may not generate long-term, stable demand for corporate bonds. Still, the RBI’s move is seen as a step towards boosting secondary-market activity, improving price discovery and expanding participation in India’s relatively shallow corporate bond market.