Indian banks leave interest-payment FX exposure unhedged, adding pressure on rupee
Indian lenders have not hedged the foreign-exchange risk on interest payments for overseas deposits, creating potential dollar demand that could weaken the rupee.
Banks in India have accumulated more than $127 billion in overseas deposits after the RBI launched a one-off swap facility to support the balance of payments. While the facility protects the principal, lenders must manage interest-payment FX exposure themselves, and most state-run and several private banks have chosen not to hedge it. The decision is driven by the roughly 3% annual cost of hedging and recent RBI actions that have buoyed the rupee.
Experts note that if the rupee weakens further, banks may need to buy dollars on the spot market, adding pressure to the currency. The risk is heightened by Brent crude approaching $100 a barrel and markets pricing a significant chance of a US Federal Reserve rate increase. At least half of banks’ interest-cost exposure remains unprotected, raising concerns about a possible dollar surge if the rupee slides toward 96-97 per dollar.
