A Reserve Bank of India (RBI)-appointed working group on Monday proposed to introduce plain-vanilla interest rate options in the market, which would help lenders manage their asset-liability mismatches better. For example, if a bank's floating rate housing loans are prepaid and fixed deposits are withdrawn suddenly, the lender could face a grave mismatch. Derivatives instruments such as interest rate options (IROs) take care of these problems. RBI had introduced interest rate swaps in the market, allowing an investor with fixed loan liability to swap exposure with a floating rate-exposed entity. However, to square it off, the parties have to enter into opposite transactions. Swaps entitle a series of payments over the contract period.

Source - http://www.business-standard.com