In the light of deregulation of interest rates, it may be appropriate to see through the principles of management, supervision of interest rate risk and their implications in Indian Banking. These principles are developed by the Basel Committee (BC) on Banking Supervision in July 2004.

Banking involves intermediation between Funds Surplus Units and Funds Deficit Units, thereby facilitating risk shifting and cash flow timing transactions in financial markets. Interest rate risk is an input in treasury risk management, as much as for mobilizing funds from "surplus units" (savers) by way of deposits/ other sources of funds where interest is payable and at the same time, while on lending the funds to "deficit units" (borrowers) interest is earnable by a bank. Hence, any major aberration between two such rates of interest, if unfavorable for a bank, would have a telling effect on its profitability. Therefore, skilled management of interest rate risk is of utmost importance for a bank keeping in view the "core" function of a bank as aforesaid.

Till 1980s interest rate both for deposits and advances in most of the banks of the world was fairly regulated. The onset of deregulation of interest rates in the financial services industry from the beginning of 1990s, saw many countries initiating a drive towards deregulation of interest rate in banking. India also swiftly joined the race as a part of its financial sector reforms commenced from mid-1990s, only rate of interest on savings bank deposits was regulated (3.5%), which has also been deregulated recently by RBI. At present, entire interest rate element in banking stands fully deregulated.

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