Indian Banks Face FX Risk on $127 Billion Overseas Deposits; Likely to Add Rupee Depreciation Pressure

Indian banks have left a significant portion of their future interest payments on overseas Foreign Exchange (FX) deposits unhedged, potentially increasing dollar demand and adding pressure on the rupee in a weakening scenario.  

As per Reuters report, Since June 2026, banks have raised over $127 billion in these deposits following the central bank's measures to bolster India's balance of payments amid rising oil prices. 

FX Risk on Interest Payments 

As per the report, while the Reserve Bank of India's special swap facility covers banks from FX risk on the principal amounts of these deposits, the responsibility of managing interest payments falls on the lenders.  

Foreign banks have largely hedged their exposure, but many state-run and private-sector Indian banks have not.  

Costly Hedges and Rupee Dynamics 

As per the report, hedging FX risk on interest payments for deposits with tenors of 3 to 5 years costs banks about 3% annually. The cost is prohibitive, especially given the recent asymmetrical risk-reward on the rupee, where positive developments could trigger a larger rally than negative news might weigh on the currency. 

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Potential Rupee Pressure 

As per the report, the rupee recently reached a 2-month high due to persistent RBI intervention and increased firepower from overseas FX deposits.  

However, with Brent crude oil prices nearing $100 a barrel and a 60% chance of a U.S. Federal Reserve rate hike, the situation could change.  

With at least 50% of banks' interest-cost exposure unhedged, renewed rupee weakness might prompt a rush for dollars. A shift towards ₹96-97 per dollar could alter banks' current hedging stance. 

Conclusion 

Indian banks have raised over $127 billion in overseas deposits, with significant FX risk left unhedged on interest payments. The cost of hedging is about 3% annually, and at least 50% of banks' interest-cost exposure remains unhedged, potentially impacting the rupee. 

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