Banking · Macroeconomics and Risk Management
A sudden spike in US Treasury yields due to Fed Tapering often causes capital outflows from emerging markets, leading to an increase in Indian G-Sec yields and mark-to-market (MTM) losses for Indian banks on their AFS and HFT investment portfolios. Which action is most appropriate for a bank to mitigate this MTM interest rate risk?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1Lowering the Base Rate to encourage domestic corporate borrowing and offset the lack of foreign capital.
- 2Reducing the Interest Sensitivity Gap by increasing the duration of the bank's long-term fixed-rate assets.
- 3Aggressively selling US Dollars in the offshore NDF market to support the Rupee's value and stabilize interest rates.
- 4Increasing the proportion of the investment portfolio held in the 'Held to Maturity' (HTM) category within regulatory limits.✓
Correct answer
Increasing the proportion of the investment portfolio held in the 'Held to Maturity' (HTM) category within regulatory limits.
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