Indian banks have raised more than $127 billion in overseas foreign-currency deposits following policy measures designed to attract dollar funding. Reuters reports that while swap arrangements can protect principal against currency risk, interest payments on part of this funding remain separately exposed and are not always fully hedged.
Foreign-currency funding has several layers of risk. A bank may protect the principal value and still face losses if the domestic currency moves sharply before interest payments are due. Hedging itself also has a cost, so institutions trade off protection against profitability.