The Reserve Bank of India is expected to hike its benchmark repo rate by 25 basis points on October 7, 2026, marking the first rate hike since February 2023 amid rising global rates and higher inflation. As per The Economic Times, this rate hike will directly lead to an increase in external benchmark-linked lending rates for banks, as noted by Asutosh Mishra, head of research at Ashika Stock Broking. The FCNR(B) scheme has now addressed the deposit problem that banks were struggling with, with Macquarie Research expecting 75 basis points of rate hikes in the next nine to 12 months, which will support further margin expansion. Private sector banks are expected to benefit more significantly, with 45% to 60% of their loan book linked to the repo rate or external benchmark rate, meaning margins will increase as rates rise.
Foreign Currency Non-Resident (Bank) deposit-driven liquidity has emerged as a key near-term catalyst for the banking sector, with banks currently using much of the additional liquidity to replace bulk deposits and park surplus funds with the RBI or in government securities. However, this liquidity will eventually find its way into lending, providing further support to systemic credit growth, as noted in the Nuvama report. The $133 billion (₹12,700 crore) raised through the FCNR(B) window provides banks with sufficient avenues to deploy the enhanced liquidity, with strong loan growth of more than 19% ensuring adequate deployment opportunities. The enhanced liquidity is expected to provide meaningful support to credit growth and help ease funding costs in FY27, as highlighted by the brokerage.
Banks with higher FCNR(B) mobilisation could witness sharper margin compression in 2QFY27, according to Nuvama's analysis. However, the brokerage expects this pressure to be gradually reversed as incremental liquidity is deployed into loans. Macquarie Research analysts expect banks to deliver 18% earnings per share (EPS) growth, driven by a 15-basis-point rise in margins in the fiscal year ending March 2028. The rate hike cycle will delay and/or cushion any margin impact from a potential shallow repo-rate hike cycle, providing relief to banks facing margin pressure from enhanced liquidity deployment. Private banks foresee robust growth in earnings as margins widen and operational costs decrease, with the macroeconomic backdrop remaining supportive for the banking sector.
An unexpected rate hike or hawkish policy communication could create short-term pressure on the Nifty and Sensex by raising the cost of capital and potentially affecting credit demand, as noted by Mint. Srivasatava from Mint emphasized that the market may increasingly differentiate between businesses on leverage, earnings visibility and pricing power, with a rate hike potentially creating short-term volatility while reinforcing RBI's focus on macroeconomic stability. Sachdeva from SS WealthStreet believes the impact on equities is likely to be mixed, with higher borrowing costs during the festive season potentially constraining consumption and investment, particularly amid weak monsoon conditions. Interest-sensitive sectors such as real estate and automobiles could face pressure on demand and profitability, though the earnings impact would depend on how quickly higher rates transmit into lending costs.
ICICI Bank leads with $17.88 billion and HSBC follows with $14.5 billion as the top two banks to garner FCNR(B) deposits, according to The Economic Times. The strong loan growth of more than 19% means banks have adequate avenues to deploy the enhanced liquidity. However, analysts note that some banks that have garnered a huge amount of deposits may need to lend to companies at a lower yield, which will not be the most efficient way to lend margin-wise. Despite this potential challenge, the supportive macroeconomic backdrop and robust loan demand should help banks capitalise on easier liquidity following FCNR mobilisation.
