India’s banking system liquidity is expected to peak in Q2FY27. This is due to strong inflows under the Reserve Bank of India’s Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme to boost cash availability with banks. According to IDFC FIRST Bank, the FCNR(B) scheme is expected to attract more than $50bn inflows

IDFC FIRST Bank noted that this surge in liquidity will ease pressure on money market rates, improve banks’ funding position and support credit growth. 

FCNR(B) inflows to drive liquidity

IDFC FIRST Bank expects most FCNR(B) inflows to arrive in September. The banks had already mobilised around $17.4 billion under the FCNR(B) scheme as of July 17 and could reach an inflows of around $50 billion by September.

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Lower funding costs for banks

FCNR(B) deposits are cheaper than certificates of deposit (CDs) and bulk deposits, allowing banks to reduce their overall cost of funds.

It added that these deposits will replace a part of banks’ CD issuances and bulk deposits rather than significantly increase total deposits. As a result, deposit growth is expected to improve gradually during FY27.

Money market rates likely to ease

The higher liquidity in the banking system will also reduce pressure on short-term money market rates during Q2FY27.

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Although liquidity is expected to decline in the second half due to higher currency leakage, the report said the RBI may need to inject only a limited amount of durable liquidity through open market operations (OMOs) in Q4FY27 because India’s balance of payments is expected to remain in surplus during FY27.

Credit growth remains strong

The report highlighted that bank credit growth continues to outpace deposit growth. Outstanding bank credit grew 18.6% year-on-year in June 2026, the fastest pace since 2012, while deposit growth improved to 13.3%.

It said stronger liquidity and lower funding costs will help banks sustain credit growth despite the elevated credit-to-deposit ratio.

Conclusion

IDFC First Bank believes that while liquidity will temporarily rise in Q2FY27, the overall credit-to-deposit ratio is likely to stabilise as deposit growth gradually picks up with FCNR(B) inflows.

However, it expects the liquidity boost to moderate in the H2FY27 as currency leakage increases.