Indian banks have paused short-term debt sales like certificates of deposit (CDs) as they pivot to cheaper foreign-currency deposits. This shift follows RBI support for overseas borrowings and is expected to help lenders manage funding costs while supporting loan growth in the coming months.
Indian banks are significantly reducing their reliance on short-term debt instruments, specifically certificates of deposit (CDs), as a new Reserve Bank of India policy encourages the use of foreign-currency deposits. Data from The Clearing Corp. of India Ltd. shows a pause in new CD issuances during early July, marking a sharp contrast to the trillion-rupee volumes seen earlier in June.
Impact of RBI Policy on Funding
The primary reason for this shift is the RBI's recent decision to absorb hedging costs for overseas dollar borrowings. By removing these costs, the central bank has made it much cheaper for Indian lenders to tap into international funding pools. This move is projected to attract over $50 billion in foreign-currency deposits. For banks, this provides a more stable and cost-effective alternative to the domestic CD market, where they previously paid higher interest rates to attract short-term capital.
Changes in Interest Rates
The reduced demand for CDs has already started to impact borrowing costs. One-year CD rates have moved down to 6.84% from a recent high of 7.96% in May. Treasury experts indicate that this trend is likely to continue through the September quarter. Banks like Axis Bank have already signaled their intent to use these foreign-currency inflows from the Indian diaspora to replace more expensive local debt. This strategy is aimed at optimizing balance sheets and managing net interest margins more effectively.
Outlook for Lenders
While the current environment favors cheaper foreign funding, the stability of CD rates will remain a key monitorable. Treasury heads at institutions such as RBL Bank and CSB Bank expect that CD issuances will remain subdued through August and September. A potential reduction of 20 to 25 basis points in borrowing costs is being anticipated by market watchers. However, lenders will need to keep a close eye on liquidity conditions. If the Reserve Bank of India decides to withdraw excess liquidity from the system starting in September, it could place upward pressure on short-term rates again. Investors tracking the banking sector should monitor bank-specific disclosures regarding their reliance on foreign-currency deposits versus traditional domestic certificates of deposit in upcoming quarterly results.