In on-site reviews over recent weeks, the RBI told certain banks to revise the accounting of their bond-forward positions and classify them using Level 3 inputs, according to people familiar with the discussions who asked not to be named because the talks were private. Level 3 applies when a position's value cannot be easily verified against market information and depends on a bank's own models.
Under RBI rules, Level 3 classification can force lenders to trim dividend payouts and count less toward regulatory capital. That makes valuation inputs more than an accounting footnote, because they can influence capital buffers and payout decisions that investors track closely.
It's routine for banks to offer bond-forward deals to insurance companies, allowing those buyers to secure future bond levels and manage interest-rate volatility. Data from the clearinghouse indicate these transactions carried a notional amount of 1.1 trillion rupees this year.
On recent calls, banks raised the matter with the Fixed Income Money Market and Derivatives Association of India and are looking for a path forward. Separately, lenders have had unofficial discussions with the Clearing Corp. of India Ltd. about feeding additional pricing data into its trade repository, and the clearinghouse has begun pilot runs of an electronic bond-forward trading system aimed at boosting price transparency. Emails seeking comment received no prompt replies from the RBI, FIMMDA, or the Clearing Corp.
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If more bond-forward positions shift to Level 3, banks could face tighter dividend room and lower regulatory capital, which can weigh on valuations. Any boost in price transparency from added data and trading trials would help investors judge liquidity and model risk in this niche hedge. Watch whether supervisory nudges turn into standard practice and how quickly pricing information improves across the market.
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