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Overnight Index Swap (OIS) Market
Context:
The Reserve Bank of India (RBI) has been reviewing the investment limit for foreign investors in the overnight index swap (OIS) market because foreign investors have utilised 96 per cent of the Rs 3.5 billion limit allocated for OIS transactions, nearing the maximum threshold.
About OIS market:
- The Overnight Index Swap (OIS) market in India is a significant component of the country’s financial system, primarily used for interest rate risk management.
- The OIS market, which is a derivative market for the government bond market, allows investors to hedge against interest rate fluctuations.
- Definition:An OIS is a type of interest rate swap where one party pays a fixed interest rate while the other pays a floating interest rate linked to an overnight benchmark, typically the Mumbai Interbank Offered Rate (MIBOR).
- The floating leg is calculated and compounded daily, making IS a popular choice for institutions looking to hedge against interest rate fluctuations.
Key Characteristics:
- Liquidity: One-year and five-year OIS contracts are the most liquid in India, though overall trading volumes are lower than in the government securities (G-Sec) market.
- Participants: Private and foreign banks are the primary players, using OIS to manage interest rate exposure.
- Settlement: OIS contracts are net settled, exchanging only the net difference between fixed and floating payments at the end of the swap period, which reduces upfront capital requirements and enhances efficiency.
Growing Importance:
- Since JPMorgan included Indian bonds in its emerging market debt index last September, trading activities increased significantly in the segment.
- This increased demand will enhance liquidity in this segment, improve price discovery, and reduce transaction costs as the volume of debt rises.
