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Mumbai , Nov. 24

THERE is a consensus emerging amongst regulators to permit market making by banks in exchange traded-interest rate derivatives, said a senior RBI official.

``Internal consultations are on within the Reserve Bank of India and discussions are also on with SEBI and the stock exchanges to permit banks with strong risk management set-up to perform the role of market makers in exchange-traded interest rate derivatives,'' said Ms Usha Thorat, Executive Director, Reserve Bank of India, participating in a panel discussion `Banks' Treasury Operations' organised by Indian Merchants' Chamber here on Monday.

Exchange-traded interest rate derivatives, a hedging instrument against interest rate movements, was introduced earlier this year. It has witnessed little trading interest from market participants as a result of trading limitations, lack of awareness of the product and necessity of exchange membership.

Ms Thorat elaborated on how interest rate risk had become a main focus for most bank managements in the event of increasing exposure to long-duration assets in the form of home loans and fixed income exposures.

She cautioned that banks should curtail their asset-liability mismatches and subscribe to floating rate bonds issued by the Government of India, which help mitigate interest rate risk. Building up of the investment fluctuation reserve would also serve as a cushion against any adverse movement in interest rates, she added.

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