While the Reserve Bank of India’s special swap facility shields banks from FX risk on the deposits’ principal amounts, interest payments need to be managed by lenders independently.
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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 of payments in the face
of surging oil prices in June.
While the Reserve Bank of India’s special swap facility
shields banks from FX risk on the deposits’ principal amounts,
interest payments need to be managed by lenders independently.
Foreign banks are largely hedging exposure. Most state-run
banks and several private-sector Indian lenders have not, the
bankers said.
One banker at a mid-sized state-run lender said their bank
had decided not to hedge the interest-payment FX exposure for
now, citing the high cost and recent comfort provided by the
RBI’s intervention-driven rupee rally.
“At the moment, the expectation is that interest payments
can be handled via spot dollar purchases when needed as opposed
to locking in protection,” the official said.
All five bankers requested anonymity because they were not
authorised to speak to the media. The RBI did not immediately
respond to an email seeking comment about the risk of unhedged
interest payments.
COSTLY HEDGES, RUPEE RISKS
It costs banks about 3 per cent a year to hedge FX risk on interest
payments for deposits of 3- to 5-year tenors, for which the
interest is paid when the deposits mature, rather than
periodically, bankers said.
The head of FX trading at a private-sector bank said the
cost of hedging is prohibitive, particularly given how recent
RBI intervention has made risk-reward on the rupee
“asymmetrical.”
Positive developments are more likely to trigger a large
rupee rally than negative news is to weigh on the local
currency, he said.
The rupee this week climbed to a two-month high amid
persistent RBI intervention, boosted by greater firepower from
the overseas FX deposits, analysts said.
That respite could be tested, however, with Brent crude oil
prices again approaching $100 a barrel and markets pricing a 60%
chance of a rate hike by the US Federal Reserve next week.
With at least half of banks’ interest-cost exposure
unhedged, renewed rupee weakness could trigger a rush for
dollars. A move toward 96-97 per dollar could shift banks’
limited inclination to hedge, said a second banker who heads FX
trading at a private-sector bank.
Published on September 8, 2026
