The Reserve Bank of India (RBI) has issued the Forward Contracts in Government Securities Directions, 2025, following extensive public feedback on the draft released on December 28, 2023. These Directions, effective from May 2, 2025, establish a comprehensive framework for conducting forward contracts on government securities—commonly referred to as bond forwards—in India’s Over-the-Counter (OTC) market. They also incorporate necessary amendments to the earlier Gazette Notification (S.O. 2192 (E) dated January 8, 2010), as reflected in the Official Gazette notification (Gazette Id no. CG-MH-E-13022025-260991 dated February 13, 2025).
Under these Directions, a bond forward is defined as a rupee interest rate derivative contract where one counterparty (the buyer) commits to purchasing a specified government security from the seller at a price fixed at the inception of the contract and on a predetermined future date. These contracts may be settled either physically—where the underlying security is transferred against payment—or through cash settlement, wherein the cash value based on the prevailing market price on the settlement date is exchanged.
Eligible market participants include both residents and non-residents who qualify under the Foreign Exchange Management (Debt Instruments) Regulations, 2019. Market-makers permitted to transact in these bond forwards are limited to Scheduled Commercial Banks (excluding Small Finance Banks, Payment Banks, Local Area Banks, and Regional Rural Banks) and Standalone Primary Dealers. These market-makers may assume unlimited long positions and take on covered short positions. Additionally, subject to certain conditions including eligibility of the underlying security for short sales, market-makers may also undertake uncovered short positions, provided that these are covered within a stipulated period.
Users—defined as non-retail entities under the Rupee Interest Rate Derivatives Directions, 2019—can take unlimited long positions and are allowed to hold covered short positions strictly for hedging purposes. To safeguard market integrity, market-makers can request appropriate documentation from users to ensure that any short positions remain covered by the corresponding government securities, with the obligation for users to exit their positions if they cease to hold the required security.
Settlement of bond forwards may occur via approved clearing arrangements, such as those provided by the Clearing Corporation of India Ltd (CCIL), or on a bilateral basis. Provisions are also made for position exit through unwinding or novation under specified conditions. The Directions further outline mandatory reporting requirements, prudential norms, margining guidelines, and compliance with applicable accounting standards. Finally, the RBI reserves the right to call for information, impose penalties, or suspend trading in bond forwards for non-compliance, ensuring robust regulatory oversight and market discipline.
