RBI Questions Bank Valuations on Bond Forward Trades, Seeking Accounting Shifts

The Reserve Bank of India (RBI) has instructed certain lenders to change how they account for bond forwards contracts, which represent billions of dollars in assets across the financial industry. According to sources familiar with the matter, the directive was issued during in-person regular audits conducted in recent weeks.

During these reviews, the central bank stated that bond-forward trades should utilize Level 3 inputs for valuation. Level 3 classification is applied when a trade's value cannot be easily verified against observable market information, requiring reliance on a bank's internal assumptions.

Under current RBI regulations, this shift in classification can compel banks to restrict dividend payments and leave them operating with reduced regulatory capital. Banks widely offer bond forwards to institutional clients such as insurers, who utilize these contracts to lock in future bond prices and hedge against interest rate fluctuations. Clearinghouse data indicates that the notional value of such trades reached ₹1.1 lakh crore, equivalent to $11 billion, this year.

In response to the regulatory scrutiny, banks have discussed the matter with the Fixed Income Money Market and Derivatives Association of India (FIMMDA) during recent calls in an effort to seek a resolution.

Additionally, lenders have engaged in informal discussions with the Clearing Corp. of India Ltd. regarding the provision of additional pricing data to its trade repository. Separately, the clearinghouse has initiated trials for an electronic bond-forward trading platform designed to enhance overall price transparency in the market.

The RBI, FIMMDA, and the Clearing Corp. of India did not immediately respond to emails requesting comment on the developments.

"Regulatory scrutiny on financial asset valuation is a critical step for maintaining systemic transparency in the banking sector. When central banks require shifts toward Level 3 inputs, it directly impacts capital adequacy and dividend distribution for lenders. For businesses and financial institutions navigating the Indian market, this highlights the growing importance of robust internal valuation models and transparent market data systems to align with evolving regulatory expectations." — Dr. Shishir Gupta, Founder & CEO, StartupLanes