Indian banks leave sizeable FX risk open on overseas deposits, creating potential rupee overhang
Lenders have raised more than $127 billion in such deposits since the central bank introduced them as part of one-off measures to strengthen India's balance of payments in the face of surging oil prices in June
Five bankers revealed that Indian banks have left a significant portion of their future interest payments on overseas FX deposits unhedged, posing a potential risk of rupee depreciation. The Reserve Bank of India (RBI) introduced such deposits in June to bolster India's balance of payments amid surging oil prices. While the RBI's special swap facility protects banks from FX risk on deposit principal amounts, lenders must independently manage interest payments.
Most private-sector banks and state-run banks have not hedged their interest-payment FX exposure, citing high costs and recent RBI interventions that have supported the rupee. Hedging interest payments for 3- to 5-year tenors costs banks around 3% annually. One mid-sized state-run lender's banker decided not to hedge due to the prohibitive cost, while another FX trader stated that the cost is prohibitive, especially given the asymmetrical risk-reward of the rupee.
A high for the rupee this week was attributed to persistent RBI intervention, but it could be tested with rising oil prices and a potential US Federal Reserve rate hike. If rupee weakness occurs, banks may rush to secure dollars, potentially triggering a shift in their inclination to hedge.
Written by urgent.news from Hindu BusinessLine's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
