The Reserve Bank of India (RBI) has decided to introduce credit default swaps (CDSs) which will allow banks to hedge their loan portfolio and minimise the credit default risk. A CDS hedges default risk if the credit goes bad in the situation where the company undergoes restructuring, bankruptcy or a downgrade. RBI’s second-quarter monetary policy 2009-10 had considered it appropriate to proceed with the introduction of CDSs. RBI intends to introduce a basic, over-the-counter, single-name CDS for corporate bonds for resident entities and all CDS trades will go to a centralised reporting platform and will eventually be brought on a central clearing platform. RBI has also decided to widen the scope of the currency basket for derivative-currency futures and said that it recognised stock exchanges would now be permitted to offer currency futures contracts in currency pairs, in addition to dollar-rupee contracts.
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