Large banks have successfully secured significant dollar deposits from the diaspora, fundamentally altering the short-term interest rate landscape. According to The Economic Times, the 3-month CD rate for top public sector banks fell 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 timeframe. Larger banks managed to edge out smaller rivals in garnering more foreign currency non-resident (FCNR) deposits ahead of the advanced deadline of August 31. As reported by The Economic Times, V.R.C. Reddy, head of treasury at Karur Vysya Bank, noted that 'the larger banks, which are the biggest beneficiaries of the FCNR(B) scheme, are absent from the CD market due to excess liquidity.'
The banking system has experienced a dramatic increase in liquidity levels, 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, this represents a substantial improvement in system liquidity. The Reserve Bank of India is conducting a record ₹6 lakh crore VRRR auction on August 31 to help mop up excess system liquidity. The weighted average call rate (WACR) has declined to 5.12% in August from 5.23% in July, trading below the repo rate of 5.25% due to excess liquidity conditions. Latest regulatory guidance emphasizes that FTP assumptions should be recalibrated to reflect lower short-term funding costs, with the reserve requirement reduction and expanded repo facilities temporarily lowering marginal funding costs.
Recent RBI data reveals a largely stable interest rate environment with only marginal changes in July 2026. According to the RBI, the weighted average lending rate (WALR) on outstanding rupee loans stood at 8.97% in July, compared with 8.96% in June, while the WALR on fresh rupee loans eased slightly to 8.52% from 8.53% a month earlier. The data shows banks have begun to trim rates offered on fresh deposits, with the weighted average domestic term deposit rate (WADTDR) on fresh rupee term deposits declining to 5.90% in July from 5.99% in June. However, the rate on outstanding term deposits remained unchanged at 6.58% during the period. On the benchmark lending front, the one-year median Marginal Cost of Funds-based Lending Rate (MCLR) of scheduled commercial banks rose to 8.70% in August from 8.60% in July, suggesting that funding costs continue to remain elevated despite the modest decline in fresh lending and deposit rates.
As of August 21, the RBI's concessional swap facility has attracted $72.85 billion in total foreign currency inflows, equivalent to nearly ₹7 lakh crore. According to The Economic Times, this substantial foreign currency inflow has contributed to the improved liquidity conditions. The central bank has preferred the overnight rate to closely align with the repo rate, yet due to excess liquidity, the weighted average call rate is trading below the repo rate. RBI governor Sanjay Malhotra expects liquidity surplus to be temporary and manageable, with excess funds likely to peak around September. Recent regulatory developments include the removal of interest-rate ceilings on 3-to-5-year FCNR(B) and 3-year-plus NRE deposits across all bank categories until 30 September 2026, with banks mobilizing USD 36.7 billion in FCNR(B) deposits till 31 July 2026 and expecting to mobilize on the order of USD 50 billion by August 2026.
Despite short-term rate easing, longer-term borrowing costs are hardening due to hawkish monetary policy signals. As reported by The Economic Times, state-owned REC rejected bids for its ₹3,000 crore 2-year bond issue this week, while PFC pulled its planned ₹2,500 crore 3-year issue after bids came in at higher yields. Alok Singh, head of treasury at CSB Bank, explained that 'the softness seen in very short-term yields has not translated to segments over one year because of the hawkish MPC minutes. Markets are expecting a rate hike sooner rather than later and no one wants to lock in duration in such a scenario.' Recent regulatory guidance emphasizes that treasury and ALM functions should reassess liquidity risk assumptions, with the temporary easing of reserve requirements and availability of term funding potentially influencing liquidity gaps and funding mix decisions.
