Shyamala Gopinath, deputy governor of the central bank, said the RBI had decided to re-examine the proposal in light of the global financial crisis, which has focused regulatory attention globally on weaknesses and dangers of the CDS market.

The RBI had proposed permitting single name, plain vanilla CDS on Indian “resident reference obligations for resident entities”, but with stipulations. The contract and underlying security must be denominated and settled in rupees.

Those plans are now likely to change. “With the benefits of lessons learnt from the global crisis, an internal group in the Reserve Bank is revisiting the issues related to introduction of CDS in the Indian markets,” Gopinath said.

The RBI’s internal group will examine the need for credit ratings on CDS transactions, which she said may be required, “at least to start with”. This, she believed, would provide more transparency, especially as the country’s secondary debt market was limited.

A second area for consideration will be whether buyers of credit protection will be obliged to have an insurable interest in the underlying debt. The RBI must decide whether market-making banks should be allowed to trade CDS without holding the underlying debts, and if so, whether any limits should apply.

Two themes that have been central to US and EU regulators’ deliberations on CDS will also crop up in India. Gopinath said: “A centralised reporting system is being contemplated in the Indian context when CDS are introduced. It would also be a challenging task to devise a centralised clearing and settlement framework for single name CDS.”