RBI To Issue Framework On Corporate Bonds Derivatives, TRS Following Budget Push

Reserve Bank of India (RBI) Governor Sanjay Malhotra has said that they would soon issue a regulatory framework on derivatives trading for corporate bond indices and on total return swaps (TRS). This announcement comes after the Union Minister of Finance Nirmala Sitharaman made key announcements on the same in Union Budget 2026 on February 1, 2026.

Malhotra, while delivering the decision of the Monetary Policy Committee’s (MPC’s) decision on interest rates said that the framework for derivatives trading on corporate bonds will be released soon. The aim of allowing derivatives trading in corporate bonds has been proposed as a measure to deepen India’s corporate bond market.

“Further, in pursuance of the announcement made in Union Budget 2026-27, we propose to issue the regulatory framework for derivatives on corporate bond indices and total return swaps on corporate bonds,” Malhotra said.

RBI has said that an active derivatives market could help manage credit risks for investors in a more efficient manner, while also improving liquidity and price efficiency in the market. The move will also facilitate the issuance of corporate bonds with wider credit ratings in the market. The consultation paper for credit index derivatives and TRS will be released soon.

Sitharaman had in her Budget speech on February 1 proposed plans to introduce total return swap (TRS) on corporate bonds along with derivatives on corporate bond indices. She announced a market making framework for corporate bonds to deepen participation in corporate bonds and improve liquidity in the segment. Sitharaman also announced incentives to encourage issuances of larger municipal bonds.

How will TRS Work?

With TRS, investors can obtain all of a bond’s economic exposure—including coupon payments and price fluctuations—without actually owning the bond. In return for a funding fee and margin, a bank or other intermediary holds the bond on its balance sheet and distributes the entire return to the investor. The investor assumes the risk of loss in exchange. They have to reimburse the original owner if the asset’s value declines.

By enabling investors to have short-term or directional views on bond yields and prices without using significant balance-sheet assets, TRS may signal a change in how investors obtain corporate credit. Tactical credit views are more important to TRS than earning carry, or net profit from owning an asset.

However, market participants have said that TRS may not generate long-term and stable demand for corporate bonds. Nevertheless, the step by the government and RBI is expected to increase activity in the secondary market. It could also improve price discovery and expand participation in a relatively shallow corporate bond market of the country.