India’s banking sector is in the spotlight after the Reserve Bank of India (RBI) revived a strategy that previously brought billions of dollars into the country’s financial system. The central bank has reopened a special window aimed at attracting long-term foreign currency inflows.
Furthermore, this move has also drawn comparisons with the highly successful 2013 programme that helped banks mobilise nearly $34 billion.
Jefferies on RBI strategy: Top stocks in focus
According to the brokerage report by Jefferies, the latest measures could strengthen liquidity, support foreign exchange reserves and create opportunities for banks with a strong track record of attracting overseas deposits.
Among private sector lenders, HDFC Bank and ICICI Bank are in focus because of the role they played during the earlier scheme.
Jefferies noted that “RBI opened the doors to FCNR-B deposits and ECB raisings by offering to bear the cost of hedging.” The brokerage added that this is “similar to the 2013 scheme when the banking sector mobilised $34 billion in total funds.”
HDFC Bank Vs ICICI Bank: Why these stocks are in focus
Jefferies in its report added that HDFC Bank and ICICI Bank were among the biggest beneficiaries of the 2013 Foreign Currency Non-Resident Bank [FCNR(B)] deposit programme.
During that period, banks used the scheme to attract foreign currency deposits from Non-Resident Indians (NRIs). These deposits provided access to a large pool of relatively stable funding and helped strengthen balance sheets at a time when the Indian rupee was under pressure.
Jefferies added, “HDFC Bank had mobilised the largest pool in 2013.” The report highlighted that the bank raised approximately $3.4 billion under the scheme, equivalent to nearly 7% of its deposit base at that time.
ICICI Bank was also among the major participants, alongside State Bank of India and select foreign banks. As per Jefferies report, access to these funds helped banks expand lending activity while also supporting margins.
What has RBI announced?
The latest initiative centres around FCNR(B) deposits and External Commercial Borrowings (ECBs).
The brokerage house in its report highlighted that RBI has reopened the FCNR(B) deposit route for maturities ranging between three and five years. These deposits are designed specifically for Non-Resident Indians looking to park foreign currency funds in India.
One of the biggest concerns for such deposits is exchange-rate risk. If the Indian rupee depreciates, depositors may see lower returns when converting money back into foreign currency. Banks also face costs associated with hedging these currency risks.
To address this issue, Jefferies noted that the RBI may bear the entire cost of hedging, although final clarity is still awaited. The central bank has also exempted these deposits from the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) requirements.
The brokerage said this framework could be even more liberal than the one introduced in 2013, when hedging support for banks was capped.
Why the 2013 scheme matters
The renewed focus on FCNR(B) deposits is largely because of the success of the earlier programme.
According to Jefferies, banks collectively mobilised around $34 billion in 2013 through FCNR(B) deposits and ECBs. Of this amount, nearly $26 billion came through FCNR(B) deposits while another $8 billion was raised through overseas borrowings.
The brokerage noted that “this was equivalent to 12% of forex reserves in August 2013.”
The key question: Will leverage return?
The brokerage house Jefferies further in its report noted that the leverage played a crucial role in driving participation during the earlier scheme. Investors were able to use their capital to secure additional funding, significantly increasing the amount of money flowing into India.
Jefferies stated that “Leverage was the biggest draw in 2013, but clarity for this time is awaited.”
The report further added that “The success of the 2013 FCNR-B deposit scheme was due to the ability to leverage personal funds by 10-20x.”
This was made possible through Standby Letters of Credit (SBLCs) issued by banks. However, the RBI later restricted such practices.
What investors need to watch
As per the Jefferies report, the success of the revived programme will depend on how attractive the returns are for overseas depositors and whether leverage-related flexibility is provided.
“Clarity on leverage for depositors will be key to returns that entice larger inflows,” added the brokerage house report.
Disclaimer: This article contains analytical insights and commentary from an external brokerage firm regarding the macroeconomic effects of the Reserve Bank of India’s foreign exchange framework and the historical performance of specific banking institutions. The data and insights presented herein do not constitute a specific direct investment recommendation, solicitation, or financial advice concerning the purchase, sale, or holding of any banking stocks, nor do they serve as an official endorsement of specific cross-border non-resident deposit products. Financial market conditions are subject to high volatility and underlying systemic risks, and readers are advised to independently verify regulatory details with respective financial institutions or consult a SEBI-registered investment advisor prior to making any personal financial or investment decisions. This disclaimer has been generated using AI to support user well-being and responsible content consumption.