How RBI’s Ban on Internal Trades Affects Indian vs. Foreign Banks (Like HSBC)
RBI’s September 2023 directive prevents banks in India from using internal trades for currency and interest rate risk management. Instead, they must use external market instruments for hedging. However, this rule impacts Indian banks and foreign banks (like HSBC) operating in India differently.
🔵 Impact on Indian Banks (SBI, HDFC, ICICI, etc.)
1️⃣ Higher Hedging Costs
- Indian banks now need to trade externally with other banks instead of doing risk adjustments within their own treasury.
- Example:
- Earlier, SBI’s Mumbai branch could hedge a USD loan with its London branch internally.
- Now, it must enter an external swap with a third-party bank (e.g., JPMorgan), leading to transaction fees and spreads.
2️⃣ Increased Counterparty Risk
- Instead of internal book adjustments, Indian banks must rely on market participants like foreign banks and hedge funds.
- This exposes them to default risks if the counterparty fails.
3️⃣ Reduced Flexibility in Risk Management
- Previously, an Indian bank could offset a currency risk within its global network.
- Now, they must execute external hedges, increasing operational complexity.
4️⃣ Greater Market Transparency ✅ (Positive Impact)
- Since all trades are done externally, regulators can monitor market pricing and flows better.
- This reduces manipulation risks and ensures fairer pricing.
Impact on Foreign Banks in India (HSBC, Citi, JPMorgan, etc.)
1️⃣ More Dependence on Global Markets for Hedging
- Foreign banks operating in India (like HSBC India) must route trades through global trading desks.
- Instead of handling currency mismatches internally, they must hedge via:
- FX Swaps with Indian banks
- Non-Deliverable Forwards (NDFs) in offshore markets
2️⃣ Increased Use of Offshore Derivative Markets
- Since INR hedging is restricted internally, HSBC India might:
- Use offshore NDF markets (Singapore, London) for INR/USD risk.
- Trade more in Global FX Swap Markets (e.g., SOFR swaps in New York, EUR swaps in London).
3️⃣ Potential for Regulatory Arbitrage
- HSBC can shift trades outside India, using its global treasury hubs in Hong Kong, London, or New York.
- While Indian banks must comply fully, HSBC has more flexibility to hedge through international desks.
4️⃣ Impact on Local Branch Operations
- HSBC India’s branch must seek external approval for hedging solutions from its global HQ.
- This can slow down decision-making and increase compliance costs.
Key Differences in Impact
| Factor | Indian Banks (SBI, HDFC, ICICI) | Foreign Banks in India (HSBC, Citi, JPM) |
|---|---|---|
| Hedging Cost | Higher due to external swaps | Higher, but offset by global liquidity |
| Counterparty Risk | Increased due to reliance on external banks | Lower due to access to global banks |
| Regulatory Oversight | Fully governed by RBI | Partially governed by RBI, can hedge offshore |
| Market Transparency | ✅ Improves pricing fairness | ✅ More transactions visible to regulators |
| Operational Flexibility | Lower (must use external hedging) | Higher (can shift trades to offshore hubs) |
| Use of Offshore Markets | Limited (must hedge domestically) | High (can use London, Singapore, etc.) |
