Axis Bank CEO Amitabh Chaudhry revealed that Indian banks are strategically using foreign-currency deposits raised from the Indian diaspora to replace expensive funds on their books before channeling money to companies. According to Bloomberg News, Chaudhry stated that "The first thing banks will do is reduce or pause growth in other very expensive deposits for some time." Following this phase, banks plan to deploy funds across infrastructure projects, data-centre investments, commercial real estate and large capital-expenditure plans. The strategy comes as loan growth has outpaced deposits, with lenders having to raise certificates of deposit rates as high as 7.5250% for three-month paper issued in March. Loans expanded 18% in the two weeks ended May 31, the fastest pace in almost two years, while deposits grew 12% over the same period, creating significant pressure on funding costs. Chaudhry expects most of the foreign deposits to originate from the Gulf region, followed by South-East Asia, as reported by The Hindu BusinessLine.
Under the RBI facility, the central bank will undertake swaps at a fixed rate of 1.5 per cent per annum, compounded semi-annually, for eligible overseas foreign currency borrowing (OFCB) with a minimum maturity of three years. According to Business Standard, analysts estimate that banks could raise $5-8 billion through the OFCB window in FY27. Another $10-12 billion could be mobilised through the external commercial borrowing (ECB) and foreign currency convertible bond (FCCB) swap window, taking total fund mobilisation through the ECB/OFCB route to $15-20 billion. The facility removes the need for issuers to hedge their future dollar liabilities, providing significant advantages for borrowers. The measure gives banks more room to offer attractive rates on foreign currency deposits, part of a broader effort by policymakers to boost foreign capital inflows and support the rupee.
State Bank of India (SBI) and Bank of Baroda (BoB) have decided not to proceed with their dollar bond issues earlier this week as investors demanded higher spreads over benchmark US Treasury yields, citing expectations of increased supply from India. According to The Economic Times, bankers noted that "If you look at the three issues that have priced already, there is a divergence in both the size and pricing. Clearly, investors are demanding higher yields and issuers must now decide how much is a profitable cutoff." The pause reflects a broader market dynamic where Indian issuers are very price-conscious, and despite the RBI concessions, they do not want to overpay. As one banker involved in the issues explained, "There is now a tussle between issuers and investors on what is the right price."
In another significant move to attract foreign currency deposits, RBI clarified last week that Indian banks and their overseas branches can extend loans to non-residents or issue guarantees in favour of foreign lenders against foreign currency non-resident deposits (FCNR) raised under the new window. According to The Economic Times, several lenders had sought clarity from RBI on whether they can raise FCNR deposits by extending loans to non-residents through their overseas branches. The last time such a scheme was announced during the taper tantrum in 2013, the banking industry raised around $34 billion from FCNR deposits, with HDFC Bank raising $3.4 billion, followed by SBI at $3.07 billion and ICICI Bank at $2 billion, as noted by Suresh Ganapathy, managing director at Macquarie Capital Securities. Bank shares have rallied in recent weeks following the announcement, as investors bet the regulator's support will help increase lenders' margins and feed into profits.
The US dollar has staged a powerful recovery as markets reprice Federal Reserve policy expectations, with Kevin Warsh's arrival as Fed Chair signaling notably more hawkish monetary policy than previously anticipated. According to latest reports, US 10-year Treasury yields are trading around 4.41%, while 2-year yields are at 4.15% and 30-year yields at 4.86%. Markets are now increasingly pricing in one quarter-point rate hike before the end of the year, with a 34% probability of a 25-basis-point July rate hike and an around 85% chance of a September rate hike. This shift from earlier expectations of rate cuts to hike bets has created significant implications for global currency markets and dollar-denominated borrowing costs.
Investors adjusted their return expectations after sensing potential rise in supply from Indian banks, leading to steadily widened spreads on recent dollar bond issuances. As reported by Business Standard, the expectation that lenders would aggressively tap the market, combined with the benefit of the RBI's subsidised swap window, led investors to demand higher spreads. The additional coupon premium sought by investors was higher than banks had expected, prompting lenders to reassess their plans. HDFC Bank's final coupon was 5.067 per cent, PFC's was 5.32 per cent, and Axis Bank's was 5.35 per cent. According to The Economic Times, "Indian issuers are very price-conscious, and despite the RBI concessions, they do not want to overpay. So, it will all depend on who blinks first and at what price."
