Derivatives reduce risk for Indian banks without increasing systemic risk.
Derivatives are complex financial tools that Indian banks are using more often. This study looked at how banks' characteristics, like size and capital, affect their use of derivatives. They found that larger banks with more capital are more likely to use derivatives to manage risks like interest rate changes. Using derivatives actually helps decrease the risk of exchange rate and long-term interest rate changes for banks. This suggests that using derivatives can be a good strategy for banks to manage risks without making the overall banking system riskier.