The Reserve Bank of India has, through its notification dated February 10th 2022, permitted banks to deal in Foreign Currency Settled Overnight Indexed Swaps (OIS). In order to understand the notification, we need to understand the concept of Overnight Indexed Swaps.
An Overnight Indexed Swap is a hedging contract wherein one party agrees to pre-determined cash flow with a counter-party on a specified date. These instruments allow the banks and financial institutions to swap the interest rates without having to refinance or change the terms of the loans they have taken from other financial institutions.
Generally, London Interbank Offer Rates (LIBOR) is used as a rate of exchange but since LIBOR is no longer applicable, an alternative exchange rate has been introduced. The rate known as Mumbai Interbank Outright Rate (MIBOR) has been introduced and is being used as a benchmark rate.
The Overnight Indexed Swaps can be undertaken by the authorised dealer. For instance, Category - I Banks can undertake these transactions through International Financial Services Centre (IFSC) Banking Units (IBUs) or via their foreign branches (in case of foreign banks operating in India, in which case, through any branch of the parent bank).
The notification is said to be effective immediately from the date of issue.