Indian banks leave sizeable FX risk open on overseas deposits, creating potential rupee overhang

Business Recorder, citing five bankers, says many Indian lenders are leaving a sizeable share of coming interest outflows on overseas currency deposits without hedging. Foreign-owned lenders have largely hedged, whereas public-sector banks and a number of private Indian banks have not. The overseas deposits gathered so far exceed $127 billion, following temporary central bank steps taken as oil prices surged.

A special swap window protects lenders against exchange-rate exposure on principal, leaving interest flows for banks to handle themselves. Hedging this interest exposure is put at roughly 3% annually for deposits with 3 to 5 year maturities, and one private bank FX trading chief described the cost as prohibitive. A mid-sized public bank has opted to stay unhedged for the time being, pointing to expensive protection and a rupee rally fuelled by intervention.

Analysts noted the rupee reached a two-month peak, helped by steady central bank intervention and extra ammunition from the offshore deposits. Still, Brent is back near $100 a barrel, and markets see a 60% probability of a US Federal Reserve rate increase next week. A slide toward 96 to 97 per dollar might change how willing banks are to hedge, a second banker said.