The Reserve Bank of India said on Tuesday it had allowed banks, primary dealers and term lenders to transact in interest rate derivatives on the country's stock exchanges.

To start with, these entities can strike deals to hedge the interest rate risk of their government securities portfolio, the RBI said.

These entities can become members of the futures and options segment of stock exchanges to undertake such transactions, or transact through those who are members, the central bank said.

In the next phase, the RBI will consider allowing these entities to hedge other items on their balance sheets and they could also be allowed to hold trading positions if they had adequate capital and appropriate risk management systems in place.

The RBI said it will hold discussions with market players at a later stage to review current guidelines and move to the next phase.

As of now, banks are allowed to trade in interest rate swaps, but these are over-the-counter transactions. Corporate entities are allowed to use interest rate swaps to hedge against the risk of interest rates moving against their favour.

The RBI has posted the guidelines on its Web site www.rbi.org.in