RismadarVoice Reporters
September 8, 2026
Indian banks are carrying significant foreign exchange risks from overseas deposits after leaving a large portion of future interest payment obligations unhedged, a situation that could increase demand for dollars and put additional pressure on the rupee if the currency weakens.
The lenders have raised more than $127 billion through foreign currency deposits since the Reserve Bank of India (RBI) introduced special measures in June to strengthen the country’s balance of payments amid rising oil prices.
While the RBI’s special swap facility protects banks against exchange rate risks on the principal amounts of the deposits, banks remain responsible for managing currency risks linked to future interest payments.
Five bankers told Reuters that while many foreign banks have protected themselves against such risks, several state-owned banks and some private Indian lenders have chosen not to hedge their interest payment exposure.
One official at a mid-sized state-run bank said the institution had avoided hedging because of the high cost involved and recent stability in the rupee following RBI interventions.
The banker said the bank expected it could manage future interest payments through spot dollar purchases when required rather than securing protection in advance.
HEDGING COSTS AND RUPEE RISKS
Bankers said hedging foreign exchange exposure on interest payments for three- to five-year deposits could cost banks around 3% annually, making the strategy expensive.
The high cost of hedging has discouraged some lenders, particularly as recent RBI actions have helped strengthen the rupee.
The Indian currency recently climbed to a two-month high following sustained interventions by the central bank, supported by increased foreign currency inflows from the overseas deposit programme.
However, analysts warned that the situation could change if oil prices continue rising or if global markets increase expectations of further interest rate hikes by the US Federal Reserve.
With at least half of banks’ interest-related foreign exchange exposure reportedly unhedged, a renewed decline in the rupee could trigger stronger demand for dollars.
A private-sector bank executive said a move towards 96–97 rupees per dollar could force banks to reconsider their current approach to hedging.
The development comes as Brent crude prices approach $100 per barrel, adding further pressure on India’s import costs and currency outlook.
The Reserve Bank of India did not immediately comment on concerns surrounding unhedged interest payment exposure.
