Bank stocks surged across the board following the Reserve Bank of India's announcement of detailed guidelines for a concessional forex swap facility available through September 30. The Nifty Bank index outperformed the market by gaining nearly 3% in the past week, as against a 0.05% decline in the Nifty 50. Public sector lenders led the rally, with Bank of Baroda rising 5.7%, Canara Bank 4.3%, and Punjab National Bank 3.7%. The Nifty Bank index had earlier advanced 1.2% at 10:18 am IST in Mumbai, with ICICI Bank emerging as the top performer among private sector lenders, rising 1.4%. The rally followed mixed performance in recent sessions, with the banking index having risen 0.4% on Friday before declining 0.8% on Monday.
Banks are urging the Reserve Bank of India to relax liquidity buffer norms for institutional deposits, aiming to increase lending capacity amidst shifting deposit trends. According to reports from The Hindu BusinessLine, the structural shift in bank deposits where savers gravitate towards investments like mutual funds, which in turn place deposits with banks, is creating pressure on traditional lending operations. The latest RBI measures, including the forex swap facility, are part of broader efforts to attract foreign capital into the country at a time when India's economy faces growth and inflation challenges.
The RBI's operational guidelines for the foreign currency non-resident (bank) or FCNR(B) swap window offer significant advantages to banks. By permitting banks to swap fresh three-to-five-year foreign currency deposits with the central bank at par, RBI is in effect absorbing the entire hedging cost, historically in the range of 2.5% to 3.5% annually. Coupled with exemptions from Cash Reserve Ratio and Statutory Liquidity Ratio requirements, the framework allows lenders to expand their dollar-denominated liabilities aggressively and offer competitive rates to non-resident Indian depositors without eroding net interest margins. As per Citi Research, the measures could generate overseas borrowings worth between $25 billion and $30 billion, while Jefferies projected even larger capital inflows of $50 billion to $70 billion. According to Motilal Oswal Financial Services, the borrowing cost for banks via ECB route will likely fall by 200-250bp, enabling the system to raise resources while keeping funding costs under control.
The Liquidity Coverage Ratio (LCR) requires banks to maintain high quality liquid assets to meet 30 days net outgo under stressed conditions, with this ratio currently at 100 per cent. As reported by The Hindu BusinessLine, as of March 2026, scheduled commercial banks' liquidity buffers were robust, with an LCR of 123.70 per cent. The run-off factor for institutional deposits from banks, insurance companies and financial institutions is pegged at 100 per cent, leaving banks with barely any surplus to lend, while retail deposits have a significantly lower run-off factor of 5 per cent.
Alongside the forex swap facility, the RBI announced several measures aimed at encouraging foreign investment and improving access to overseas capital. According to the central bank, all new issuances of 15-year, 30-year, and 40-year government bonds will be included under the Fully Accessible Route, with bonds in this category already part of three global bond indexes. The central bank also removed limits relating to short-term investments, concentration norms, and individual securities applicable to foreign investment under the general route. RBI Governor Sanjay Malhotra said these measures, along with tax benefits announced by the government, are expected to support greater foreign participation in government borrowing programmes. The combined measures underscore the central bank's efforts to attract higher dollar inflows and strengthen funding avenues for both the government and the banking sector.
