The apex bank intends to introduce the new product by March and has currently prepared a draft framework with regard to standard documentation, benchmarks, capital adequacy and the list of participants to be allowed to conduct swaps.

The RBI is also considering the introduction of commercial papers with revolving underwriting facility (RUF) which make a CP akin to a revolving letter of credit and will reduce costs for corporates issuing the CPs.The move to introduce interest rate swaps was announced in the monetary policy of October 1998 and is likely to deepen the money market as it will enable market participants to hedge interest rate risks. Corporates, on their part, will be able to managetheir cash flows more effeciently as they will have a direct access to the money market through this derivative.

According to sources, the draft framework put in place has said commercial banks, primary dealers and corporates will be allowed to conduct interest rate swaps. However, no decision has yet been taken whether all corporates will be allowed to enter into interest rate swaps.

"Overseas only those corporates that have a good credit rating are allowed to conduct swaps. Prudential norms are likely to be applied as a credit risk is involved for the bank and the primary dealers entering into interest rate swaps," a source said. The RBI has said the capital adequacy norms for banks will apply as per a department of banking operations and developement (DBOD) circular, issued in 1992. The calculation of risk weightage will be based on the norms laid out in the circular. The circular says that the credit risk exposure attached to off-balance sheet items has to be first calculated by multiplying the facevalue of each of the balance sheet items by the credit conversion factors.

The RBI says that if the original maturity of the swap is less than one year-as most interest rate swaps are expected to be-the notional principal amount of each intruments should be multipled by 0.5 per cent, while for maturities of one and less than two years, the principal has be multiplied by 1.0 per cent. For each additional year the notional principal will be multiplied by 1 per cent for calculation of risk weights.

According to the RBI, interest rate contracts include single currency interest rate swaps, basis swaps, forward rate agreements, interest rate futures, interest rate options purchased and other contracts of a similar nature.