Interest rate risks: RBI wants banks to look at derivatives

Sinha feels that apart from the take-out financing route, the seeking of credit risks, securitization markets, derivative markets need to take care of the other aspects of risks

Don't want to miss the best from Business Standard?

The Reserve Bank of India wants public sector banks to look at derivative products to deal with interest rate risks. “You can go into derivatives, but as I understand, particularly our public sector banks are not there in that domain. In fact, I seriously urge they should look at that for mitigating the interest rate risks,” said Anand Sinha, deputy governor, RBI, on Wednesday.

Speaking at a banking conference in Mumbai, Sinha said the question of asset-liability management (ALM) mismatch was that “we are dealing with such-long term projects. One way to handle this kind of a situation is to promote take-out finance...”

Talking on ALM, so far, the liquidity part has not been a constraint. “It might be a constraint, because a majority of the banking sector are retail banks. So, you fund yourself from retail deposits and while the composition of retail deposits may change from short term to long term, or from long term to short term. But essentially, as a pool it remains. So, I do not think that has been a constraint so far,” said Sinha.

According to him, the interest rate risk remains. “The second issue is that of a credit risk in such a long-term financing. Therefore, there is an issue of market development.”

What is happening is that several products are being launched, but unfortunately these products are not really taking off. “For example, credit default swaps (CDS). That is another measure of shredding risks for a very long-term project. But that also has not really taken off,” he added.

Sinha feels that apart from the take-out financing route, the seeking of credit risks and securitisation of markets, derivative markets need to take care of the other aspects of risks. “We have to see what measures we take. From the RBI side, a number of measures have been put into the market. But we have to seriously examine how to stimulate them further,” said Sinha.

Without referring directly to the Indian context, Sinha said monetary policy had to be sensitive and it could not leave everything to macro- prudential measures. "Central banks, while formulating their monetary policy, will have to keep a much longer time horizon (normally two years) in view and adjust their monetary policy so that the objective of financial stability is achieved even if it leads to some dip in growth and some under-shooting of inflation target," Sinha said.

According to Sinha, growth may come down a bit and inflation target may go below the target--that is if you have a target of two per cent, it may become 1.8 per cent. But this is the price which monetary policy will have to pay. Due to this from a systemic perspective, the two will have to adjust to each other.