In an exclusive interaction with Adlin Pertishya Jebaraj, Correspondent of Finance Outlook India, Alok Singh, Group Head Treasury at CSB Bank Limited shares how the changing monetary policies of the RBI are forcing banks to rebalance their bond portfolios and defend their margins. He explains that although Indian banks and NBFCs are relatively tough, only limited derivatives depth still exposes them to interest-rate shocks. Alok has been a part of the Banking and Financial services industry for nearly two decades with extensive experience in investment management, asset liability management, enterprise risk management, liquidity management, remittances and hedging of interest rate risks. 

How have recent changes in the RBI’s monetary policy influenced interest-rate risk management from an industry perspective? 

The Reserve Bank of India (RBI) has made significant changes in its monetary policy over the last 1824 months i.e. alternating between neutral and accommodative policy as well as the reverse. The changes in these policies have been reflected in the Indian yield curve: the yields increased in the second half of 2023, followed by the softening in 202425 and the hardening in 2025. 

This cyclical volatility highlights the point that interest-rate risk management is a dynamic process that is ongoing in the Indian banking system. Not only is it essential to protect Net Interest Margins (NIMs) but also to reduce the possible depreciation of investment portfolios in terms of mark-to-market.  

The recent steps of the RBI can be summarized into two categories (i) liquidity injections and (ii) a redefinition of policy position. Both of them forced banks to revisit the profile of duration of their bond portfolios. These portfolio adjustments are at an industry level as evidenced in the resulting steepening of the yield curve. In the future, both the efficient management of the duration and active observation of demand-supply disorders will be the keystone in the process of stabilizing the yield curve. 

How prepared are the institutions in India’s banking industry–PSUs, private banks, and NBFCs–in dealing with interest-rate shocks? 

The regulatory environment in which asset-liability creation is done in India has given the financial system of India some form of resilience. Indian banks, non-banking financial companies (NBFCs) and corporates operate within a clear prudential regime unlike in the developed economies whereby corporations and banks operate with more leverage and due to unregulated exposure to borrowing. This makes a system less susceptible to shocks around the world, but it has also constrained the development of a hedge-fund-like ecosystem of distributing risks more widely. 

Practically, the process of dealing with interest-rate shocks in Indian banks and NBFCs is mainly done through optimization of the portfolio duration, matching the asset-liability mismatches, and meeting the regulatory limits. Nevertheless, lack of an adequate depth and breadth of a derivatives market, and involvement by only few non-bank players that could take up risks limits the degree of actual hedging. This means that although domestic institutions are robust, they are vulnerable to the different levels of interest-rate shock, which are not always completely countered. 

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What role does interest-rate sensitivity play in banks' investment decisions in government securities and bonds? 

Interest-rate sensitivity has been a determining factor on how the banks invest on the government securities and fixed-income instruments. These portfolios directly affect Net Interest Margins and the stability of the earnings, due to the length and shape of these portfolios. In fact, when interest rates are on the increase, then this generally causes a rebalanced effort by the banks to cut short any long-duration securities to limit the possible valuation losses. 

Duration analysis, therefore, is an important input in the investment decision making, but it is applied differently in various institutions based on their asset-liability structures, funding profiles and regulatory capital considerations. Banks that are less affected by the balance-sheet effect can support longer-duration liability and those that depend more on it must support shorter duration. 

How do you see fintech partnerships supporting banks in enhancing their risk management approaches? 

Fintech partnerships have been a part of enhancing the risk management framework of banks. Advanced technological capabilities, agility, and innovative solutions that are brought by Fintechs are complementary to the traditional banking systems.  

In particular, behavioral analytics, predictive modeling, and advanced forecasting have become a widely used tool in the sphere of risk management. Such new methods frequently capitalize on machine learning and algorithmic intelligence that are more effectively implemented through fintech solutions as opposed to core banking components. 

These partnerships allow banks to improve risk monitoring in such areas as payments, fraud prevention, KYC/AML compliance, credit quality evaluation, NPAs management, and forecasting interest-rate risk. Accordingly, Fintech ecosystems are regarded as the so-called surround systems, which complement core banking business with specific features, forming a more responsive and proactive risk management ecosystem. 

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What does 2030 look like for banks in India, adapting to a more dynamic interest-rate environment? 

By the year 2030, the interest-rate cycles are to be shorter and more volatile and this requires increased dynamism in the risk management practices. At the same time, the potential of digitization and real time data is boosting the capacity of banks to identify, track, as well as react to the flow of money in real time. This development, in addition to regulatory frameworks that are increasingly changing in line with the market realities, places the industry in a better position to structure more complex interest-rate risk management. 

Nevertheless, one of the most significant structural changes can be anticipated: the stable funding ratio is expected to decrease, which will increase the presence of asset-liability mismatches and increase the systemic sensitivity to fluctuations in the rate. Meanwhile, an increasing number of market participants and the creation of a more sophisticated financial market will give an opportunity to share risks. 

Essentially, both the magnitude of risks and the level of tools and players that can be incorporated to address the same will increase simultaneously in the next decade. Those institutions that constantly renew their capabilities will be in a good situation, but laggards might have to struggle with more pressing and acute problems.