Indian banks have sharply reduced interest rates on foreign-currency deposits following the closure of the Reserve Bank of India's special FCNR(B) swap window on Monday, ending a ten-week scramble for overseas funds. HDFC Bank reduced its five-year US dollar FCNR(B) rate to 3.15% from 6.25%, a cut of 310 basis points, effective September 1. ICICI Bank similarly cut its five-year dollar deposit rate to 2.90% from 6.00%, also a reduction of 310 basis points. State Bank of India's regular 5-year FCNR(B) rate is now 3.05% compared with 5.75% offered for deposits of up to $1 million under its Advantage FCNR(B) scheme, implying a 270-basis-point reduction. The sharp reset shows banks rapidly unwinding the premium they were willing to pay for long-duration dollar deposits once the RBI-supported economics of raising such funds disappeared.
Indian banks are aggressively shedding expensive bulk deposits as record foreign currency non-resident (FCNR-B) mobilisation reduced the requirement for costlier domestic funds. According to The Economic Times, larger banks could have saved about 25-60 basis points in terms of incremental cost of deposits in August as the shedding of bulk funds gained momentum. As reported by The Economic Times, Canara Bank mobilised $4.8 billion under the special mobilisation scheme, surpassing the $1.5 billion target. Bank of India managing director Rajneesh Karnatak told ET that there could be savings of 50-60 basis points as banks won't renew bulk deposits. The strategy helps optimise funding costs and could potentially improve second-quarter net interest margins at several lenders.
Short-term fundraising by banks through certificates of deposit (CD) dropped to a four-month low of ₹68,130 crore in August, according to Prime Database. This represents the lowest issuance since April 2026, when CDs raised ₹45,700 crore. The decline reflects banks' reduced dependence on CDs after receiving heavy inflows in FCNR-B deposits, which replaced the majority of bulk deposits. HDFC Bank, Small Industries Development Bank of India, Bank of Baroda, Canara Bank, and Central Bank of India were the top five issuers, together raising ₹46,770 crore or 68.7% of total issuances. As reported by The Economic Times, Alok Singh from CSB Bank noted that regular issuers reduced their issuance in anticipation of large FCNR inflows, while Anshul Chandak from RBL Bank explained that most banks have retired bulk deposits and CDs with FCNR-B deposits.
The banking sector experienced a net withdrawal of ₹6,534 crore in deposits during the fortnight ended August 15, according to Reserve Bank of India's latest weekly data. This trend indicates that banks are not renewing bulk deposits mobilised at higher costs when these are coming for maturity. As reported by The Economic Times, Bank of Baroda chief economist Madan Sabnavis explained that banks are replacing bulk deposits by foreign currency non-resident bank deposits (FCNR-B) they mobilised using the concessional swap facility provided by the banking regulator. The contraction is particularly noteworthy given the significant inflows into foreign currency non-resident (FCNR) deposits following the RBI's measures to make such deposits more attractive.
Banks' credit outstanding also declined by ₹70,639 crore during the fortnight under review, bringing total credit to ₹220.08 lakh crore. As reported by The Economic Times, the credit growth print also contracted to 18.3% against 19.3% in the preceding 15-day period. Economists suggest that lower credit offtake could be a reflection of slower economic activity, indicating potential weakness in credit demand across the banking sector. However, analysts like Sachin Sachdeva from rating agency suggest that credit growth tends to fluctuate month-to-month and is often influenced by seasonal factors, and it does not appear to be a major concern at this stage.
The FCNR-B mobilisation has significantly boosted banking system liquidity, with daily average liquidity standing at ₹3.41 lakh crore in August compared to ₹1.07 lakh crore in July. According to The Economic Times, as of August 21, the RBI's concessional swap facility had attracted $72.85 billion in total foreign currency inflows, equivalent to nearly ₹7 lakh crore. Currently, liquidity in the banking system is estimated to be in surplus of around ₹6.65 lakh crore as on August 31, according to RBI data. The Reserve Bank of India conducted 23 variable rate reverse repo (VRRR) auctions in August and two on September 1, with auctions receiving good response for overnight maturity but tepid response for longer maturities. Interest rates at the extreme short end of the curve have eased, with the 3-month CD rate for top public sector banks falling to 6.40% from 6.80% a month ago, while the 1-year CD rate rose to 7.30% from 7.09% during the same time frame.
