Search the Internet          Tips  Sites: Finance, Investment

RBI asks banks to hedge against rate risk

The Reserve Bank of India has asked banks to protect themselves against interest rate risks, which are likely to increase, with the country having considerably deregulated rates in the past few years.

India has gradually moved to a system of market-determined rates over the past decade, allowing the central bank to use benchmarks such as the bank rate and the repo rate as tools of monetary policy.

The bank rate is the rate which the central bank lends funds, while the repo rate is the rate at which it borrows. "It is important that banks build up adequate cushion in a benign interest rate scenario so as to permit a soft-landing once the interest rate environment turns adverse," the Reserve Bank of India said in an annual report on banking.

Banks' profits will depend on whether or not interest rates moved in tandem with their expectations, the report on Trend and Progress of Banking in India said.

As the debt market was developed alongside the deregulation of interest rates, Indian banks have increased their exposure to the primary and secondary debt markets.

The report said that investments in government debt securities comprised nearly two-fifths of banks' total assets by March 2002.

The RBI said that in the year ended March 2002, the drop of over 300 basis points in bond yields had substantially boosted banks' profits.

Net profits of all banks increased by 81 per cent, boosted by gains form securities trading.

The RBI has asked banks to prepare an "investment fluctuation reserve", which will be built from bond-trading profits.

ALSO READ:
Bill Gates in India
More Money Headlines