India’s central bank on Thursday said it will 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 in the Union Budget 2026-27 to deepen the country’s corporate debt market.
In a statement, the central bank said an active derivatives market could help investors manage credit risk more effectively, 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 soon be published for public feedback, the company said.
In her Budget speech on February 1, 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 support larger municipal bond issues.
A TRS allows investors to gain full economic exposure to a bond, including coupon payments and price movements, without owning the bond itself. Under this structure, the bank or intermediary holds the bond on its balance sheet and passes the total return to the investor in exchange for financing costs and margin. In return, the investor assumes the risk of loss. If the price of the asset falls, he must pay the difference back to the original owner.
Directional bets
Treasury officials said the introduction of TRS could mark a shift in the way investors approach corporate credit, allowing them to take short-term or direct views on bond yields and prices without using large amounts of balance sheet capital. Market participants also said that TRS is less about earning carry (net profit from holding assets) and more about expressing tactical credit views.
While similar structures are widely used in overseas government bond markets and selectively offshore investors in Indian debt, officials warned that TRS may not generate long-term stable demand for corporate bonds. Still, the RBI’s move is seen as a move to boost secondary market activity, improve price discovery and broaden participation in India’s relatively shallow corporate bond market.
