Indian banks are sharply reducing their reliance on short-term debt instruments as cheaper foreign currency funding, backed by the Reserve Bank of India (RBI), emerges as a more attractive source of capital. The shift is expected to continue through September, easing funding costs and improving the stability of banks’ balance sheets.
Banks have not issued any certificates of deposit (CDs) , short-term debt instruments with maturities of up to one year, during the three trading sessions through 2 July, according to data from The Clearing Corp. of India Ltd. This follows a slowdown in issuance during the second half of June, when lenders raised Rs 70,800 crore compared with nearly Rs 1,00,000 crore in the first half of the month. The second-half issuance was also around 19 per cent lower than the corresponding period last year.
The decline comes after the RBI introduced measures in June to encourage banks to raise foreign currency deposits by absorbing hedging costs on eligible overseas fund raising. The initiative is expected to attract more than $50 billion in foreign currency inflows, offering banks a cheaper and longer-term funding source than CDs.
Borrowing costs have already responded. The yield on one-year CDs has fallen to 6.84 per cent from a more than two-year high of 7.96 per cent recorded in May. By comparison, banks are currently offering interest rates of up to 7.75 per cent on foreign currency deposits with maturities ranging from three to five years.
“Banks will refrain from issuing CDs excessively in July-September on expectations of foreign-currency deposit flows,” said Anshul Chandak, Head of Treasury at Emirates NBD-backed RBL Bank, according to media reports. He added that CD rates could stabilise before firming up only if the RBI aggressively withdraws liquidity.
Banks are increasingly viewing overseas deposits as a more dependable source of funding. Axis Bank plans to use foreign currency deposits mobilised from the Indian diaspora to replace relatively expensive domestic borrowings. Meanwhile, Alok Singh, Head of Treasury at CSB Bank, said foreign currency inflows are becoming a “more stable, permanent cash flow”, adding that CD issuance is likely to remain subdued until August or September, with rates potentially declining by another 20 to 25 basis points.
The transition underscores how the RBI’s latest liquidity and forex measures are reshaping banks’ funding strategies, reducing dependence on short-term domestic borrowing while supporting lower funding costs and stronger balance sheets. |
