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Interest-rate risk in the Indian banking system

Author

Listed:
  • Ila Patnaik

    (ICRIER)

  • Ajay Shah

    (Ministry of Finance)

Abstract

Many observers have expressed concerns about the impact of a rise in interest rates upon banks in India. In this paper, we measure the interest rate risk of a sample of major banks in India, using two methodologies. The first consists of estimating the impact upon equity capital of certain interest rate shocks. The second consists of measuring the elasticity of bank stock prices to fluctuations in interest rates. We find that as of 31 March 2002, many major banks had economically significant exposures. Using the first approach, we find that roughly two-thirds of the banks in the sample stood to gain or lose over 25% of equity capital in the event of a 320 bps move in interest rates. Using the second approach, we find that the stock prices of roughly one-third of the banks in the sample had significant sensitivities.

Suggested Citation

  • Ila Patnaik & Ajay Shah, 2005. "Interest-rate risk in the Indian banking system," Risk and Insurance 0501003, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpri:0501003
    Note: Type of Document - pdf; pages: 40. This paper measures interest rate risk in banking using maturity statements of banks(MVE approach) and stock market data (AMM models)
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    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/ri/papers/0501/0501003.pdf
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    Cited by:

    1. Ricardo Hausmann & Catriona Purfield, 2004. "The Challenge of Fiscal Adjustment in a Democracy; The Case of India," IMF Working Papers 04/168, International Monetary Fund.
    2. Singh, Nirvikar & Srinivasan, T. N., 2004. "Fiscal Policy in India: Lessons and Priorities," Santa Cruz Department of Economics, Working Paper Series qt8nx3v467, Department of Economics, UC Santa Cruz.
    3. International Monetary Fund, 2004. "Interest Rate Volatility and Risk in Indian Banking," IMF Working Papers 04/17, International Monetary Fund.

    More about this item

    Keywords

    Interest rate risk; interest rate volatility;

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