Banks’ derivatives portfolios show higher sensitivity to rate and currency shocks in Sept 2025: RBI FSR

Reserve Bank of India

• Indian banks' derivatives more sensitive to rate, FX shocks in Sep 2025 vs Mar 2025
• MTM impact from rupee shocks reversed, showing shift in currency risk positions
• Foreign banks' derivatives income rose sharply, but fell for state-owned banks

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Indian banks’ derivatives portfolios became more sensitive to interest rate and foreign exchange shocks in September 2025 compared with March 2025, according to the Reserve Bank of India’s Financial Stability Report.

Bottom-up stress tests conducted on select banks show that the impact of interest rate shocks, measured through changes in net mark-to-market (MTM) positions, increased during the period, with almost equal magnitude of gains and losses for a similar rise or fall in domestic interest rates.

The RBI said the direction of the net MTM impact from rupee exchange rate shocks reversed in September 2025 relative to March 2025, indicating a shift in banks’ underlying currency risk positions.

As per the stress test results, a rise in domestic interest rates resulted in a positive MTM impact of 5.9 per cent of total capital in September 2025, compared with 3.8 per cent in March 2025. Conversely, a fall in interest rates led to a sharper negative impact of 5.8 per cent in September 2025, up from 0.7 per cent in March.

The report also highlighted changes in banks’ exposure to exchange rate movements. While depreciation of the rupee led to a marginal positive MTM impact of 0.3 per cent of capital in September 2025, appreciation of the rupee resulted in a negative impact of 1.2 per cent, reversing the pattern seen earlier in March.

The RBI noted that income from derivatives portfolios, comprising changes in net MTM positions and realised income has risen sharply for foreign banks over the past year, increasing their contribution to net operating income.

In contrast, the contribution from derivatives remained relatively lower for public and private sector banks, turning negative for state-owned banks, while staying broadly stable for private banks.

Based on notional principal amounts, foreign banks were found to have more diversified counterparties, whereas most derivative positions of public and private sector banks were concentrated with other banks.