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Personal finance - Title : CDS – Relevant or Exotica?

Tags: CDS, Credit Default Swap, Exotic Instruments, Bond Market


Meta description: The Reserve Bank proposes to introduce the Credit Default Swap (CDS) in India. This can develop our bond markets. But adequate care is need to avoid committing the mistakes of the West


What’s happening? The Reserve Bank of India has re-initiated the process of allowing Credit Default Swaps (CDS) in Indian markets – something that it had initiated before the 2008 meltdown and put in cold storage since then. It proposes to allow Banks and certain other qualified market participants to write CDS’s and for holders of bonds to buy them. There are of course some worries because these were the instruments that were primarily responsible for the US sub-prime crisis in 2008. Yet, the RBI has tried to ensure that the learnings from the US experience are taken into account while gradually introducing the product in India.

What does it mean for me? There is little immediate impact. Given the speed at which policy moves in India, it may well be over a year from now that the CDS comes into existence, and a couple of years after that for its effect to become

visible (pardon us if we sound cynical!) But if and when it does come into existence, it is likely to be a positive for Banks and corporate sector alike. Infrastructure, real estate, heavy industry and other similar capital heavy sectors could benefit more. The benefit of this would also indirectly accrue to you, since your mutual funds and insurance companies would be able to take advantage of CDS to invest in a broader set of products. This would further explode the range of investment options available to you (as if you didn’t already have enough!)

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CDS – Relevant or Exotica  
CDS – Relevant or Exotica