Banking stocks outperformed the broader market on September 3, with Nifty Bank closing 0.36% higher at 57,380.60 despite a sharp late selloff in benchmark indices. The Sensex tumbled 417 points, or 0.55%, to 76,153 and the Nifty 50 fell 41 points to 23,873 after reversing sharply from a strong opening. According to Moneycontrol, the banking index pared much of its early gains after having risen over 1% at intraday high, but still finished in positive territory. The India VIX ended 2.54% lower at 11.33, indicating reduced market volatility. Nifty Realty emerged as the strongest sectoral performer, rising 2.58%, while Nifty Smallcap 100 gained 1.20% and Nifty IT fell 0.85%.
Banking stocks substantially outperformed the broader market throughout the session, with Nine of the 16 major sectors advancing, led by lenders who mobilised a higher-than-expected $136.38 billion through the RBI's foreign-currency deposit and borrowing schemes. The Nifty Bank index rose 1.01% to 57,753.60 in early trade, while the Nifty Private Bank index ended 0.51% higher and the Nifty PSU Bank gained 0.48%. Among individual stocks, Axis Bank emerged as the top gainer among the 30 Sensex constituents, rising 1.04% to ₹1,267, with HDFC Bank gaining 0.83% to ₹706.65. IDFC First Bank was the biggest gainer within Nifty Bank, rising 2.83% to ₹87.50, followed by IndusInd Bank, which climbed 2.74% to ₹1,004.80. Yes Bank gained 1.76% and Union Bank of India advanced 1.15%, while ICICI Bank and SBI finished with more modest gains of 0.25% and 0.24% respectively. However, gains were not uniform, with Federal Bank falling 2.48% and PNB declining 0.58%.
The surplus liquidity due to robust FCNR(B) flows is expected to lower banks' cost of funds by up to 50 basis points as dependence on higher-cost certificates of deposit (CDs) eases, according to senior banking officials. CD rates have declined sharply since the RBI announced the FCNR(B) swap facility on June 8, with the three-month CD rate falling 130 basis points to 5.86% on September 3 from 7.16% on June 8. The six-month rate declined 99 basis points to 6.46% from 7.45%, while the nine-month rate fell 53 basis points to 6.94% from 7.47%. The one-year CD rate declined 50 basis points to 7.02% from 7.52%, and the one-month rate fell 74 basis points to 5.52% from 6.26%. As per Jefferies, the three-month CD rate had fallen 90 basis points in August alone, with the three-month CD rate at 5.9% on September 3 compared with 6.8% on August 4. Banks raised ₹68,130 crore through CDs in August, the lowest since April 2026, with issuances falling sharply as banks face less pressure to raise short-term funds.
The sharp surge in foreign-currency inflows has significantly boosted liquidity across the banking system, with Motilal Oswal Financial Services noting that banks have garnered $136.38 billion in forex inflows under the RBI's twin swap facilities, with FCNR(B) deposits accounting for $127.23 billion. The resulting surplus liquidity is expected to support credit expansion, particularly short-term lending, while enabling refinancing agencies to prepay costlier loans. According to MOFSL, the brokerage has raised its FY27 system credit growth estimate by around 150 basis points to 15.5-16%, a potential positive for banks' balance sheets and earnings. The mobilisation, which substantially exceeded earlier expectations, has boosted banking-system liquidity and strengthened India's external buffers. The FCNR(B) deposit window closed on August 31, while the facilities for ECBs and OFCBs will remain open until December 31. Among individual banks, ICICI Bank has mobilised $17.88 billion of FCNR(B) deposits, capturing 14% market share of the total FCNR(B) inflows, while SBI has garnered $9 billion and is expected to beat its $10 billion guidance. RBL Bank mobilised $3.4 billion through the facility during the period, with its international banking unit subsequently deploying $1.08 billion as loans backed by these deposits, while IDFC First Bank mobilised a gross amount of $3.57 billion from NRI customers.
The $136 billion mobilisation has created a "problem of plenty" for Indian lenders, as highlighted by CNBC-TV18, with banks now facing the challenge of deploying this massive influx of foreign funds. The surplus liquidity is expected to improve banks' Liquidity Coverage Ratio (LCR) by up to 1 percentage point, with large lenders currently having LCRs ranging from 115% to 144%. According to Jefferies, the $136 billion mobilisation is equivalent to around 5% of bank deposits and 6% of bank credit, significantly higher than the 3.2% of deposits and 4.1% of credit under the 2013 FCNR(B) scheme. Banks could deploy the funds into fresh loans, use them to refinance older high-cost borrowings, or park them with the RBI under the Standing Deposit Facility (SDF). Jefferies estimates that FCNR(B) deposits could create an additional annual profit pool of ₹100-110 billion for banks, equivalent to around 2% of profit before tax. The liquidity infusion is also expected to benefit public sector enterprises, which will be able to access funds at lower rates and potentially prepay older loans at higher rates, reducing their interest burden. With surplus liquidity at ₹10.31 lakh crore and set to rise further as banks complete FCNR(B) swaps, CD rates are expected to remain soft, while large banks may stay away from the market while smaller lenders could use the low-rate environment to raise funds at significantly lower costs before liquidity conditions normalise.
