Introduction
Regulation 18(5)[1], clause (8) of the SEBI (Infrastructure Investment Trusts) Regulations, 2014 permits Infrastructure Investment Trusts (InvITs) to invest their liquid funds in interest rate derivatives (IRDs). The framework governing IRDs is prescribed by the Reserve Bank of India (RBI) through the RBI Interest Rate Derivatives Directions, 2025, issued in December 2025.
This article examines whether InvITs are eligible to invest in IRDs under the revised RBI framework.
Question of Law
Prior to December 2025, investment in IRDs was governed by the RBI Interest Rate Derivatives Directions, 2019. Paragraph 3.1[2] of the 2019 Directions permitted all regulated entities to participate in IRDs, subject to approval from their respective financial regulators. Further, clause (xxv)[3] of paragraph 2 defined a regulated entity as any person, other than an individual or HUF, whose activities were regulated by a financial sector regulator in India, including SEBI.
Since InvITs are regulated by SEBI, there was no ambiguity regarding their eligibility to participate in IRDs under the 2019 Directions.
In December 2025, the RBI replaced the 2019 Directions with the RBI Interest Rate Derivatives Directions, 2025. Unlike the earlier framework, the 2025 Directions do not specifically refer to InvITs or other SEBI-regulated entities. This raises the question of whether InvITs can continue to invest in IRDs despite the express permission available under the InvIT Regulations.
Analysis of the Provisions
Paragraph 3.1[4] of the 2025 Directions provides that eligible participants in IRDs include residents. Paragraph 2(xxviii)[5] further clarifies that the term resident shall have the same meaning as assigned under the Foreign Exchange Management Act, 1999 (FEMA).
Under Section 2(v) of FEMA, a resident includes a person who is registered or incorporated in India. That means, in order to fall under the definition of resident, an InvIT should be registered in India.
with respect to person being registered in India, InvITs are mandatorily required to be registered with SEBI in order to operate as Infrastructure Investment Trusts. Accordingly, InvITs satisfy the requirement of being registered in India and can be regarded as residents for the purposes of the 2025 Directions. Consequently, they qualify as eligible participants in IRDs.
Further, the 2025 Directions define a “user” as a person who undertakes derivative transactions otherwise than as a market-maker. The InvIT Regulations permit investment in IRDs but do not contemplate InvITs acting as market-makers. Therefore, InvITs would also fall within the category of users under the 2025 Directions.
Conclusion
A conjoint reading of the InvIT Regulations and the RBI Interest Rate Derivatives Directions, 2025 suggests that InvITs are eligible to participate in interest rate derivatives. Although the 2025 Directions do not specifically mention InvITs, they permit participation by residents, and InvITs qualify as residents by virtue of being registered in India. Additionally, InvITs fall within the category of users since they undertake derivative transactions other than as market-makers.
Accordingly, InvITs may invest in interest rate derivatives under the 2025 Directions, subject to compliance with the conditions prescribed under Regulation 18(5), clause (8)[6] of the InvIT Regulations.
[1] (viii) interest rate derivatives, including interest rate futures, forward rate contract and interest rate swap, subject to the following conditions:
[2] (1) Any person resident in India and any non-resident, to the extent specified in these Directions, is eligible to participate in IRDs. All regulated entities shall participate in IRDs with the permission of and subject to the terms and conditions, if any, fixed by their respective regulators.
[3] (xxv)Regulated entity means any person, other than an individual or HUF, whose activities are regulated by any one of the financial regulators in India viz., Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI),
[4] 3.1The following persons would be eligible to participate in IRD markets:
(i) A resident;
[5] (xxviii)‘Resident’ means and includes a ‘person resident in India’ as defined in section
2 (v) of Foreign Exchange Management Act, 1999 (42 of 1999).
[6] A. investment in interest rate derivative shall be solely to hedge an underlying interest rate risk in the existing borrowings which qualifies as an effective hedge as per the applicable Indian Accounting Standards;
B. that such investment shall only be made as a user or a client of such interest rate derivative, and shall not be in the nature of market making;
C. adequate disclosures regarding investment in interest rate derivative shall be made in the annual report;