Banks may’ve left $127 bn exposed to a big risk

Indian banks have potentially left $127 billion in future interest payments on overseas FX deposits exposed to significant risk, according to five bankers. The lenders raised more than $127 billion in such deposits since the central bank introduced them in June to strengthen India's balance of payments amid surging oil prices. While foreign banks are largely hedging their exposure, many state-run banks and private-sector Indian lenders have not, citing high costs and recent comfort from the RBI's intervention-driven rupee rally.

Hedging interest payments for such deposits typically costs banks around 3% per year, making it prohibitive, especially with recent RBI intervention making the risk-reward asymmetrical on the rupee. Positive developments are more likely to trigger a large rupee rally, while negative news may weigh on the local currency. With at least half of banks' interest-cost exposure unhedged, a renewed rupee weakness could trigger a rush for dollars, potentially shifting banks' limited inclination to hedge.