Use of Interest Rate Derivatives in Indian Banks: An Empirical Study

Finance and Accounting

Interest rate risk can be seen as one of the most important forms of risk, that banks face in their role as financial intermediaries. There are various recent developments and innovation in financial theory, increased computerization, and changes in foreign exchange markets, credit markets and capital markets have contributed to the need to supplement traditional methods to measure and manage interest rate risk with more recent methods. Interest rate risk can thus be controlled optimally by using of derivatives along with traditional methods, in order for banks to experience less interest rate uncertainty, and to increase their lending activities, which can result in greater returns and higher overall profitability. The present study focuses on the theoretical aspect of the use of Interest Rate Derivatives(IDR) and testing empirically on four top tier Indian commercial banks. Our result shows that banks are using the IDRs as a very handy tool for hedging and managing interest rate risks.

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