The flow of foreign currency non-resident (Bank), or FCNR(B), deposits through the Reserve Bank of India’s special swap window is expected to rejig the funding profile of banks by lowering their cost of deposits and easing pressure on net interest margins (NIMs).
While some high-cost deposits may be allowed to run off, some could be repriced at lower rates. Improved liquidity will also give banks the option to expand their loan books.
Banks weigh growth against deposit costs
“Banks will have to put in place a strategy on how to use the FCNR(B) deposits, whether to grow the balance sheet size or cut down on the cost of deposits. NIMs are compressing for all banks across the spectrum. Some banks may look at realigning the deposit base; others may not retire high-cost debt while focusing on growth. They also have to keep in mind that these deposits have to be returned after their three-year and five-year periods,” said Karthik Srivasan, senior vice-president and group head, financial sector ratings, ICRA.
Strong inflows of FCNR(B) deposits could lead to a decline in the share of bulk deposits in banks’ total deposit base or result in their repricing, depending on banks’ liquidity positions.
As of July 17, banks had raised $17.41 billion through the FCNR(B) route under the RBI’s swap scheme. Along with $1.97 billion raised through overseas foreign currency borrowings (OFCBs) and $1.34 billion through external commercial borrowings (ECBs), total foreign exchange inflows under the measures stood at $20.72 billion.
According to a report by BofA Global Research, the flow of deposits has been somewhat backloaded, as more banks launched their mobilisation drives only from mid-July. The central bank, therefore, appears well on course to raise more than $60 billion by the end of the programme, which has another 11 weeks to run.
“If we extrapolate the current trends on the 2013 deposit accretion pattern, it implies India could be on course to accumulate around $80 billion, but we stick to our more conservative estimate of $60-70 billion,” the report said.
“The rupee liquidity will improve and bring down the overall cost of deposits in the system. These deposits can be contracted at lower rates and used to improve NIMs,” said Shashi Dhar, head of treasury and global markets, Bank of Baroda.
As of March 31, 2026, Bank of Baroda had a deposit base of Rs 14 lakh crore, with about 15% comprising wholesale deposits.
FCNR(B) deposits may support HDFC Bank’s margins
Private lender HDFC Bank’s share of wholesale deposits in its total deposit mix rose to 20% in the June quarter, from 17% a year ago. FCNR(B) deposits could benefit the country’s largest private sector bank by lowering deposit costs and supporting its NIMs. In the quarter ended June, the bank’s NIM fell 13 basis points to 3.26%.
“We believe HDFC Bank would be a key beneficiary of the FCNR(B) deposit mobilisation scheme, which would further support credit growth and also margins,” Nuvama Institutional Equities said in a report.
The report also said HDFC Bank would benefit on the deposit side. “We believe that FCNR inflows could potentially boost deposit growth and thereby benefit the bank in terms of LDR (loan-to-deposit ratio) contraction as well as margin recovery,” it added.
Banks have been contracting wholesale deposits at 7.10-7.15%. This could fall towards FCNR(B) deposit rates of 6-6.6%, which a majority of banks are currently offering.
On the wholesale lending side, FCNR(B) funds are competitive under the current interest-rate structure.
“From a cost-effectiveness perspective, 6%, and then if you look at the all-in cost after hedging the coupon, etc, it will be somewhere maybe 6.30%, 6.40%, which is of course lower than the wholesale lending rates. And it will therefore be competitive compared to the wholesale lending rates. And of course, there will be an incremental loan growth opportunity also as these funds start getting deployed,” ICICI Bank Group Chief Financial Officer Anindya Banerjee told analysts.
Certificates of deposit (CDs) as a source of funding for banks are also likely to see some deceleration as lenders reduce their dependence on the debt market.
“We will not access the CD market at least for the next 12 months. The Rs 50,000 crore worth of CDs will all be retired as and when they come up for repricing,” said Ashok Chandra, managing director and CEO, Punjab National Bank.
According to the RBI’s latest data, the amount raised by banks through CDs fell to Rs 37,080 crore in the fortnight ended July 15, 2026, from Rs 69,828 crore in the preceding fortnight.
FCNR(B) inflows are expected to boost rupee liquidity and help banks fund credit growth.
“With the FCNR(B) deposits coming in the near term, we will focus on growth and deployment of the additional liquidity raised through this route,” Axis Bank managing director and CEO Amitabh Chaudhry told analysts in a post-earnings call.