Indian lenders reported strong deposit growth in the July-September quarter, significantly aided by the Reserve Bank of India’s foreign currency swap facility that closed on August 31. While this window helped boost liquidity and balance sheets, investors are now focusing on whether banks can maintain this momentum without the special support, as funding costs and deposit sustainability become key monitorables.
Indian banks navigated the July-September quarter with a significant boost to their deposit bases, thanks to the Reserve Bank of India’s (RBI) concessional FCNR(B) swap window. The facility, which concluded on August 31, 2026, acted as a major lever for deposit accumulation, mobilizing approximately $136.4 billion in total foreign currency inflows across the system.
The mechanism was designed to help banks attract more foreign currency deposits. By having the RBI absorb currency hedging costs, banks were able to offer interest rates that were 150 to 200 basis points higher on USD FCNR(B) deposits than usual. This move effectively made these accounts more attractive to non-resident Indian depositors, allowing banks to strengthen their liquidity positions ahead of the busy lending season.
Major public and private lenders reported strong double-digit growth in deposits and advances during the quarter. Bank of Baroda, for instance, saw a 17 per cent year-on-year rise in domestic deposits, while Bank of India reported a 21.6 per cent increase. In the private sector, AU Small Finance Bank stood out with a 28.6 per cent jump in deposits. Punjab National Bank also noted a steady 9.9 per cent growth in deposits, alongside a 14.8 per cent rise in advances, marking a positive trend in credit appetite.
Despite these strong headline figures, the end of the swap facility brings new questions for the coming quarters. The primary challenge for the banking sector is now to sustain this deposit growth without the support of the special window. With the concessional facility no longer available, banks may face increased pressure on their net interest margins—the difference between the interest they earn from loans and the interest they pay to depositors.
There is also the ongoing structural challenge where credit growth has consistently outpaced the growth of core domestic deposits for many lenders. As the boost from the swap window fades, banks may have to turn to more expensive sources of funding, such as wholesale market borrowings or certificates of deposit, to maintain their credit-deposit ratios. A shift toward higher-cost funding can weigh on profitability and margins.
Going forward, the key factor for investors will be how banks manage this transition. The focus will remain on whether lenders can successfully ramp up core retail domestic deposits to replace the liquidity provided by the FCNR(B) window. Monitoring upcoming quarterly results for commentary on deposit growth sustainability, cost of funds, and the management of credit-deposit ratios will provide a clearer picture of how individual banks are navigating this environment.