Interest rates on short-term financial instruments like Certificates of Deposit are poised to decrease across India, with CD rates expected to fall by 75-100 basis points by July after surging to multi-year highs. As reported by The Economic Times, average CD rates reached 8.08% in the last week of May, the highest in over two years, according to central bank data. Following the RBI's recent measures aimed at attracting foreign currency inflows and supporting the rupee, money market rates have softened meaningfully. Between May 26 and June 10, 2026, 2-3 month Bank CD rates softened to around 6.85-6.90% from 7.48-7.52% earlier, while 12-month Bank CD rates declined to about 7.55% from 7.98%, according to The Hindu BusinessLine.
On Friday, the Reserve Bank of India unveiled steps to attract dollar inflows, including fully subsidising hedging costs on foreign currency deposits raised from non-resident Indians. According to reports from Business Standard, the subsidy covers non-resident deposits with maturities of three to five years raised until September 30. With the RBI absorbing hedging costs, banks can convert dollar deposits into rupees more cheaply, giving them access to lower-cost funding that is expected to flow into investments, including government bonds. The policy measures are designed to attract foreign currency deposits from non-resident Indians, potentially providing significant liquidity support to the Indian financial markets.
Short-term Indian government bond yields fell to their lowest in three months on Wednesday, steepening the yield curve to a one-year high on expectations that banks will invest funds raised under the RBI's dollar inflow measures in this segment. As reported by Business Standard, yields on two- to five-year bonds have fallen by up to 30 basis points, led by the 6.36 per cent 2031 bond, which has accounted for about $500 million of the roughly $1 billion in foreign purchases over the past three days. The gap between five- and 10-year yields has widened to a one-year high of 40 basis points, more than double its pre-policy level, with the five-year yield falling more sharply than the 10-year. Following the RBI's recent measures, money market rates have softened meaningfully, with improved market confidence and expectations of better funding conditions.
The influx of foreign funds is creating significant opportunities in corporate bond markets, with Indian companies actively raising short-term debt after the central bank's measures to support the rupee triggered a sharp fall in borrowing costs. According to The Economic Times, companies, led by non-banking financial firms, are raising more than ₹310 billion ($3.24 billion) through up to five-year bonds this week, representing one-third of what was raised in April and May combined. State-run REC raised three-year funds at 7.34% earlier this week, much lower than prevailing levels in the secondary market, while NABARD raised funds for three years at 7.34% after cancelling a similar issue in May where rates could have touched nearly 8%. Other major non-bank lenders including Bajaj Finance, Muthoot Finance, Bajaj Housing Finance and L&T Finance have planned issuances of ₹85 billion, ₹27.5 billion, ₹20 billion and ₹15 billion respectively.
Despite external economic challenges due to the West Asia conflict, there is no let up in demand for short-term funds of up to one year tenor from banks and India Inc as interest rates have softened at the shorter-end. In the current financial year (FY27) so far (up to June 8, 2026), banks' cumulatively mopped up ₹2,18,290 crore via 190 CD issuances against ₹2,55,025 crore raised by 249 issuances in the first three months of FY26, according to Prime Database. Similarly, India Inc cumulatively mopped up ₹3,60,219 crore via 1,712 CP issuances against ₹4,50,746 crore raised by 2,166 issuances in the first three months of FY26. As of May 31, 2026, incremental credit growth of all scheduled banks at 17.44% was 530 basis points higher than their incremental deposit growth of 12.14%, highlighting the banking system's credit growth outpacing deposit growth.
