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.
UPSC relevance: GS III banking, external-sector vulnerability and risk management. Revise currency mismatch, hedging and swap arrangements.
Prelims Lens
Prelims Lens
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.
Mains Lens
Mains Lens
Central issue: Large foreign-currency deposits have strengthened funding, but interest payments can still create exchange-rate exposure if banks leave them unhedged.
Dimensions: Economy
Possible UPSC-style questionDiscuss the key Economy issues raised by “Indian banks have a hidden FX risk in overseas deposits”.
