Indian banks leave sizeable FX risk open on overseas deposits, creating potential rupee overhang
MUMBAI: Indian banks have left much of their future interest payments on overseas FX deposits unhedged, creating a source of potential dollar demand that could compound depreciation pressure in a rupee-weakening scenario, five bankers said. 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…
Five Indian bankers revealed that many of their country's banks are leaving significant foreign exchange risk exposed on overseas deposits, which could lead to a rupee overhang if the currency weakens. Since June, lenders have mobilized more than $127 billion in deposits under a one-off initiative by the Reserve Bank of India (RBI) to bolster the nation's balance of payments amid soaring oil prices.
While the central bank's swap facility safeguards banks against FX risk on the deposits' principal amounts, banks must independently manage interest payments. Most state-run banks and several private-sector Indian lenders have not hedged their interest-payment FX exposure, according to the bankers. One mid-sized state-run lender's banker stated that their bank has opted not to hedge interest-payment FX exposure at the moment, citing high costs and recent RBI interventions that have strengthened the rupee.
The RBI unloaded at least $8 billion last week to stabilize the rupee, the bankers said. The expectation is that interest payments can be handled via spot dollar purchases when required instead of locking in protection.
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- Indian banks leave sizeable FX risk open on overseas deposits, creating potential rupee overhang thehindubusinessline.com
