How to Navigate volatility with Treasury Strategies in Dynamic Interest Rate Environment

Uncertainty seems to be the only certainty in today’s world. With the pandemic and its subsequent recovery, fluctuating inflation, geopolitical conflicts, macroeconomic shifts, tariff wars, etc., the world is enveloped in volatility. It has had an effect on the global economy. Financial institutions, especially banks, have had to maintain a close eye on the interest rate movements. 

For treasury professionals, this entails a shift in mindset. Volatility adversely impacts the cost of funds, bond yields, and liquidity positions. Managing a bank’s funds, cash flows, and investments demands more agility and taking informed decisions.

Today’s outlook

The treasury professional in a bank manages a bank’s surplus financial resources through strategic investments to improve its profitability. They have to constantly monitor the interest rate movements as that directly influences the lending and borrowing rates, affecting cash flow and investment decisions. For treasury teams, volatility mandates that funds are allocated to investments depending on the current market situation and risk evaluation. 

The treasury team needs to mitigate volatility through rigorous data analysis, strategic foresight and risk management. Here, analytical tools, including scenario analysis and predictive modelling can provide valuable insights. Preparation, then, becomes more important than prediction. 

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Navigating the volatility

Staying flexible with investment duration: Interest rates are moving unpredictably – what used to take 18-24 months is now unfolding in merely 6-9 months. In such a scenario, one can’t afford to lose value by locking funds into long-term investments. Also, as treasury professionals, it is imperative to identify opportunities to generate robust yields. Recalibrating portfolio duration and striking a dynamic balance between risk and reward can be an ideal way to maintain a healthy return.

Keeping portfolio flexible: The evolving volatile markets make it vital to maintain a certain portion in liquid investments for generating cash, whenever required. Treasury teams need to focus on building enough liquidity to meet obligations comfortably. Deploy a mix of high-quality liquid assets (HQLAs), diversified short-term instruments and contingency plans—making sure you are always prepared while optimising short-term returns.

Using derivatives as a safety net: With the right oversight and risk controls, one can leverage interest rate swaps and forward rate agreements to hedge rate exposure.  As you remain compliant with RBI’s prudent risk guidelines, ensure interest-sensitive assets and liabilities are cushioned from unpredicted swings.

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Aligning assets and liabilities thoughtfully: A strong asset-liability management framework is like a compass in a storm. It helps you to align the loan book and deposit base effectively. This ensures that we’re not caught off guard when market rates move in either direction.

Leveraging technology for smarter decisions: With modern treasury operations becoming increasingly complex, digital adoption is a necessity rather than a choice. The ideal scenario requires a real-time dashboard, AI-based market prediction models and scenario simulators to make informed decisions swiftly.

Looking at the future: As treasury professionals, we may not be able to control market volatility, but can stay prepared for it. A well-calibrated treasury function does not see volatility as a challenge, but as an opportunity to optimise returns, strengthen resilience, and align financial operations with the bank’s long-term goals.

There’s a deep belief in shaping a treasury team that grows with the times, meets uncertainty with calm confidence, and never loses sight of stability and customer trust. When these values guide the team, they naturally stay aligned with the bank’s long-term vision. Because at its core, managing interest rate swings isn’t just a technical task—it’s about creating a steady platform for growth, even when the road ahead is uncertain.

Vinod A N is GM & Head – Treasury at South Indian Bank.