Indian banks reported 21.1% deposit growth, but domestic flows grew only 12.2% without temporary FCNR(B) swap facility inflows. This gap signals underlying liquidity pressure as banks shift focus to organic deposit mobilization after the window closed in August.
The banking sector’s performance in the September quarter contains a hidden divergence between headline growth and organic reality. While major lenders reported an average year-on-year deposit growth of 21.1%, much of this increase was driven by the Reserve Bank of India’s (RBI) special Foreign Currency Non-Resident (Bank) swap window. When these temporary foreign currency inflows are excluded, the actual growth in domestic deposits stands at a more modest 12.2%.
This discrepancy of nine percentage points suggests that banks have relied on short-term regulatory facilities to mask a sluggish trend in core domestic deposit gathering. A similar distortion appears in credit disbursement figures. While headline credit growth for these institutions reached 24.2%, the core growth rate drops to 18.9% when loans linked to these specific swap facilities are removed. This indicates that core banking operations are under pressure, with low-cost Current Account and Savings Account (CASA) deposits struggling to keep pace with the expansion of assets.
The reliance on the swap window was not uniform across the sector. RBL Bank experienced the most significant impact, with its deposit growth falling from 34% to 6% once the FCNR(B) inflows were stripped away. Other large lenders also faced noticeable compression: ICICI Bank’s growth rate moderated from 27.1% to 17%, while Kotak Mahindra Bank’s growth declined from 23.2% to 13%. HDFC Bank, while demonstrating higher resilience, still saw four percentage points of its reported growth attributed to the special facility.
With the RBI’s swap window officially closed as of August 31, banks are now focusing on deploying the $133 billion mobilized during the facility’s operation. Management teams at major banks, including ICICI Bank and Kotak Mahindra Bank, have signaled that this surplus liquidity will be channeled into fresh lending and the retirement of high-cost wholesale borrowings over the next two quarters. While this provides a short-term buffer, the industry faces a structural challenge. The high credit-deposit ratio of 81.6% at the end of September highlights the tight liquidity environment banks continue to navigate.
For investors, the key monitorable over the next two quarters is whether banks can accelerate organic domestic deposit growth. If banks fail to improve CASA growth, they may be forced to rely on more expensive wholesale funding to sustain their lending momentum, which could put pressure on net interest margins—a critical measure of banking profitability. Investors may track future quarterly results to see if domestic deposit trends improve to compensate for the absence of the swap window support.