Mumbai: The Reserve Bank of India (RBI) has announced final guidelines for the introduction of interest interest rate futures contracts.

The rate futures, based on the notional value of a 10-year government bond and will be subject to an overall limit of $4.7 billion, the RBI said in a release.

The contracts will be settled physically and more contracts on 2-year and 5-year bonds could be rolled out at a later date depending on the response, the RBI said.

Foreign institutional investors will only be allowed to tale long positions with an overall cap of $4.7 billion while they can only take short positions to hedge actual exposure in the cash market, the report said.

Banks and primary dealers will be able to use interest rate futures for hedging as well as trading purposes, subject to regulatory and prudential norms, the report said.

The RBI along with stock market regulator SEBI is also introducing exchange-traded currency futures.

The RBI today placed the `Report of the RBI's Technical Advisory Committee on Money, Foreign Exchange and Government Securities Markets on Interest Rate Futures' on its website.

The technical advisory committee, with VK Sharma, executive director of RBI, as chairman, was set up to recommend measures to facilitate development of a robust interest rate futures market for management of interest rate risk.

The report of the working group on interest rate futures was placed on RBI's website on 3 March 2008 for public feedback and comments and was finalised by the technical advisory committee after taking into account the feedback and comments received from the public, experts, banks, market participants and the Government of India.