Lenders pivot to foreign-currency deposits following the central bank’s strategic decision to absorb overseas hedging costs.
Indian banks are drastically reducing short-term debt issuance in favour of cheaper, more stable foreign-currency deposits.
The Reserve Bank of India recently altered domestic liquidity dynamics by encouraging foreign-currency deposits. Consequently, Indian lenders are actively reducing their reliance on short-term debt sales. This strategic policy shift provides banks with a much cheaper source of funding.
Financial institutions recently halted the issuance of short-term certificates of deposit. Data show that zero- to one-year maturity debt instruments were sold in three sessions through July 2. This remarkable pause follows a significant decline in overall issuance during late June.
Banks raised roughly one trillion rupees in early June. However, this figure dropped drastically to just $7.4 billion between June 16 and June 29. This late-June volume represents a notable 19 per cent decrease compared to the previous year.
This borrowing slowdown stems directly from a pivotal decision by a central bank last month. Policymakers agreed to absorb the hedging costs for lenders raising overseas dollars. Therefore, market experts expect this subdued issuance trend to persist until September.
Analysts anticipate this regulatory adjustment will successfully attract more than $50 billion in foreign capital. Banks gain a significantly cheaper substitute for traditional domestic debt instruments. Historically, lenders relied heavily on these certificates to finance rapid loan growth.
Treasury experts note that institutions will consciously avoid excessive debt issuance throughout the current quarter. They anticipate strong inflows from foreign-currency deposits to meet liquidity requirements. Furthermore, borrowing costs via traditional instruments have already declined noticeably.
The interest rate on one-year certificates recently eased to 6.84 per cent. These rates had peaked at a massive two-year high of 7.96 per cent in May. Meanwhile, lenders are currently offering up to 7.75 per cent on longer-term foreign deposits.
Industry leaders confirm that overseas diaspora funds will quickly replace highly expensive domestic capital. Treasury heads view these incoming foreign flows as permanent and highly stable cash streams. Experts predict certificate rates could fall further by roughly 25 basis points soon.
(Source: BusinessLine)
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