Indian banks have halted short-term debt sales, shifting to cheaper foreign-currency deposits encouraged by RBI policy. This strategy aims to lower funding costs as deposit growth struggles to match credit demand. Investors should watch for lower bank borrowing costs and shifts in liquidity management as overseas funds enter the system.
Indian commercial banks have sharply reduced their reliance on certificates of deposit (CDs) in early July as a new funding avenue opens up. Data from The Clearing Corp. of India shows that no new CDs were issued in the three trading sessions leading up to July 2. This pause marks a clear shift from the previous month, where banks had raised nearly 1 trillion rupees in the first half of June alone to manage tight liquidity.
Strategic Funding Shift
The pivot is driven by the Reserve Bank of India’s recent decision to absorb hedging costs for overseas dollar borrowings. By removing the cost burden of protecting against currency fluctuations, the RBI has made foreign-currency deposits a highly competitive and sustainable alternative to domestic debt. Banks are now prioritizing these inflows over issuing CDs, which have become increasingly expensive as lenders compete for domestic retail and corporate deposits to fund robust credit growth.
Market experts note that this trend is likely to persist through September. With the RBI’s initiative expected to channel over $50 billion into the banking system, lenders are finding that foreign-currency deposits provide a more stable and cost-effective cash flow. This influx is already impacting short-term borrowing costs. One-year CD rates have dropped significantly, falling to 6.84% recently from a peak of 7.96% in May. Some industry observers anticipate further declines of 20 to 25 basis points in these rates as banks continue to prioritize the cheaper foreign capital.
Impact on Bank Profitability
For banking stocks, this development is significant because the cost of funds is a major driver of net interest margins. When banks rely heavily on CDs, their margins often come under pressure due to the high interest rates required to attract those funds. By replacing expensive local debt with more affordable foreign-currency deposits, banks can potentially protect or improve their profitability despite the ongoing challenge of loan growth outpacing deposit growth.
While the current environment is supporting bank balance sheets, the long-term sustainability of this funding source remains a key monitorable. The primary risk for banks is the dependency on liquidity conditions; if the RBI shifts its stance and begins to aggressively absorb liquidity from the system, CD rates could harden quickly. Furthermore, banks must manage the risks associated with global interest rate volatility, even with the RBI providing hedging support. Investors should track future quarterly disclosures to see if this shift successfully lowers interest expenses and stabilizes margins in the upcoming earnings cycles.