Author(s)

Dilip Kumar

Indian Institute of Management Kashipur, Kashipur, India.

In this paper, we examine the impact of interest rate risk factors on the interest rate derivatives (IRD) usage by commercial banks in India. We focus our analysis during the period 2008-2010. We have taken this period to highlight that during and after global financial crisis, what were the main factors that influence the interest rate derivatives usage by Indian commercial banks. We have used simulation analysis and regression analysis to identify the interest rate risk factors. Using Tobit fixed effect analysis, we are able to provide empirical evidence that interest rate risk drives the derivatives usages by Indian commercial banks. Our results indicate that asset size, the impact of interest rate shock on equity capital are positively related to use of derivatives for hedging as well as trading and interest rate sensitivity factor is negatively related to the use of derivatives for hedging and trading. New generation private banks have relatively large exposure to derivatives for trading purpose.

Interest Rate Risk, Banks, Interest Rate Derivatives, Risk Factors, Tobit Fixed Effect Model

Kumar, D. (2017) Factors Impacting the Interest Rate Derivatives Usage in Indian Commercial Banks. Theoretical Economics Letters, 7, 596-614. doi: 10.4236/tel.2017.73045.