New Delhi: Indian banks are sharply reducing their reliance on short-term debt after the Reserve Bank of India’s (RBI) recent measures to attract foreign-currency deposits opened up a cheaper and more stable source of funding.
The shift follows the RBI’s temporary incentives to mobilise fresh Foreign Currency Non-Resident Bank [FCNR(B)] deposits, which have encouraged banks to access longer-term overseas funding instead of issuing short-term debt instruments.
Short-term debt issuance comes to a halt
According to data from The Clearing Corporation of India Ltd (CCIL), banks did not issue any Certificates of Deposit (CDs)—short-term debt instruments with maturities of up to one year—during the three trading sessions ending July 2.
The pause comes after issuance had already slowed significantly. Between June 16 and June 30, banks raised around Rs 70,800 crore through certificates of deposit, a marked decline from previous periods.
RBI incentives make foreign funding cheaper
The decline in CD issuance follows the RBI’s decision to encourage banks to mobilise fresh FCNR(B) deposits by offering a concessional foreign exchange swap facility.
Under the scheme, the central bank absorbs hedging costs for eligible foreign-currency deposits with original maturities of three to five years, substantially reducing banks’ cost of raising overseas funds. The facility is available until September 30, 2026.
Bankers say the incentives have made foreign-currency deposits a more economical and durable funding source than short-term domestic borrowing.
Strong response from NRIs
The RBI’s initiative has received a strong response from non-resident Indians (NRIs).
Bankers estimate that nearly $7 billion worth of FCNR(B) deposits were booked during June alone, with demand coming from NRIs in markets including Dubai, Singapore and the United States.
Industry estimates suggest total inflows could reach $50 billion before the September deadline if current trends continue.
Lower funding costs expected to benefit banks
The availability of cheaper foreign funding has also pushed down certificate of deposit rates.
Market analysts believe lower borrowing costs will improve banks’ net interest margins, allowing them to refinance liabilities more efficiently while reducing dependence on expensive short-term wholesale funding.
Some lenders have already begun tapping overseas debt markets under the RBI’s swap window, with more issuances expected in the coming months.
Shift reflects changing funding strategy
The RBI’s measures are encouraging banks to diversify their funding profile by replacing short-term borrowings with more stable, longer-tenor foreign-currency deposits.
Analysts believe this shift could strengthen liquidity management while reducing refinancing risks associated with frequent short-term debt issuance.
Conclusion
The RBI’s push to attract foreign-currency deposits is reshaping the funding strategy of Indian banks. With FCNR(B) deposits emerging as a lower-cost and longer-term source of capital, lenders are reducing their reliance on certificates of deposit, a trend that could improve liquidity management and support profitability in the coming quarters.