The Reserve Bank of India has cautioned banks against waging a loan price war as they sit on substantial liquidity following the $133 billion influx from foreign currency non-resident (FCNR) deposits. According to The Hindu BusinessLine, RBI officials emphasised that loan pricing should be risk-based at a recent meeting with senior bankers, warning against compromising underwriting standards in pursuit of higher returns. The central bank's concerns stem from the natural tendency among lenders to push loans and go down the credit matrix when inundated with liquidity. The fear is that aggressive lending to generate returns that cover interest outgo on deposits may show up as sticky assets a few years down the line. As reported by The Hindu BusinessLine, RBI officials stated that banks should not compromise on underwriting standards in their quest for higher returns, particularly given the robust credit growth of 19-20% clip currently being witnessed.
Indian banks achieved a significant milestone by raising $133 billion in deposits through the Reserve Bank of India's concessional forex swap window as of August 31, 2026. According to the latest RBI data, FCNR(B) deposits accounted for the bulk at $127.226 billion, while overseas foreign currency borrowings (OFCBs) and external commercial borrowings (ECBs) mobilised $5.32 billion and $5.30 billion respectively. The RBI facilitated this record mobilisation by absorbing the full hedging cost for principal on these 3-5 year tenor deposits, allowing banks to offer higher interest rates to attract substantial deposits from the diaspora. The mobilisation was significantly higher than market estimates of $90-100 billion, demonstrating strong market response to the scheme. Notably, the FCNR(B) deposit window was closed earlier than initially planned following strong inflows, highlighting the overwhelming response from overseas Indians to the central bank's incentives.
Reserve Bank Deputy Governor Rohit Jain stated that banks are expected to deploy additional liquidity from FCNR(B) deposits over the next few months, driven by anticipated strong credit demand during the festive season. According to The Times of India, speaking at the SBI Banking & Economics Conclave, Jain said the RBI has held discussions with banks to discuss their liquidity position following the FCNR inflows. "Banks are expected to deploy FCNR(B) liquidity over the next few months, helped by the upcoming festive season and strong credit demand," he said, adding that the RBI is not directing banks to any particular sector to deploy the mobilised funds. The deputy governor further noted that banks will have full discretion on deployment of FCNR(B) liquidity, based on their credit pipeline, proposals and liquidity outlook. As reported by The Times of India, Jain emphasized that "banks' asset-liability position will determine how they use the additional liquidity," with the central bank not seeing any particular sector requiring caution at present. Credit demand is broad-based, with all sectors and segments growing reasonably well, and the central bank expects healthy credit standards to continue.
The latest RBI data shows that total inflows under the special FCNR(B) scheme stood at $143.596 billion as of September 18, 2026, according to authorized dealer banks. This updated figure reflects the robust response to the scheme, which prompted the RBI to close the FCNR(B) window one month ahead of the originally planned September 30, 2026 closure date. The scale of the response was so significant that the central bank achieved its objective ahead of schedule, bringing forward the closure to August 31, 2026. FCNR(B) deposits are fixed-term deposits held in foreign currencies, with the principal and interest repaid in the same currency, shielding depositors from direct rupee exchange-rate risk. The arrangement allows non-resident Indians to place foreign-currency funds with Indian banks without taking direct rupee-currency risk, making it an attractive proposition for the Indian diaspora. The surge in FCNR(B) deposits has pushed bank deposit growth to 17.8% as of August 31, 2026, with deposits increasing by nearly ₹9.5 trillion during this period, according to Business Standard. This has narrowed the gap with credit growth, which stood at 19.1% in the same fortnight, to just 130 basis points.
The latest RBI data reveals that outstanding bank deposits fell by ₹2.59 lakh crore during the fortnight ending September 15, with total deposits reaching ₹276.2 lakh crore. According to The Economic Times, this contraction may reflect banks not renewing high-cost bulk deposits as they now enjoy the cushion of overseas deposits from the dedicated dollar-mobilisation programme. Deposit growth moderated to 17.3% at the end of September 15, down from the decade-high 17.8% recorded a fortnight prior. Meanwhile, credit growth slowed to 18.1% compared with 19.1% at the end of August, with outstanding credit contracting by ₹57,894 crore to ₹223.3 lakh crore. The moderation in growth rates was influenced by not renewing high-cost bulk deposits, as banks now have access to cheaper overseas deposits. The incremental credit-deposit ratio fell sharply to 62.56% from 92.22% a fortnight earlier, indicating that for every ₹100 of incremental deposits, banks extended around ₹63 of credit.
The excess liquidity from FCNR(B) deposits is expected to significantly impact corporate lending rates, with banks flush with funds looking to deploy substantial portions in corporate loan books. According to bankers, credit to industry grew 20% year-on-year in July, with credit to large industries growing nearly 18% YoY and credit to medium industries rising over 30%. A senior banker at a large private sector bank noted that "a lot of the entities that have raised this liquidity are not those with large retail networks, particularly foreign banks. For foreign banks, the natural avenue for deployment would be the corporate segment." Major banks have reported healthy growth in corporate loan books in recent quarters, with corporates increasingly shifting towards bank financing amid elevated yields in debt capital markets. A senior banker at a state-owned bank emphasized that "corporate banking clearly earns more than parking the liquidity in RBI instruments," making corporate lending the preferred deployment avenue. However, there's always a regulatory concern that banks may end up with excessive lending to non-banking finance companies (NBFCs), with loans to NBFCs growing at a significantly higher rate. The banks are flush with liquidity following strong mobilisation through FCNR(B) deposits, with most banks indicating they would first look to replace high-cost deposits with these funds, as already playing out with volumes in the certificate of deposit market falling and rates softening.
