By swapping $127.23 billion of FCNR(B) deposits with the RBI, banks drew substantial rupee liquidity, curbing their need for CD funding.
| Photo Credit:
Certificate of deposit (CD) rates have slipped below 6 per cent from the 7-7.25 per cent levels seen about three months ago, primarily due to the flood of liquidity generated by banks swapping Foreign Currency Non-Resident (Bank) or FCNR(B) deposits with the Reserve Bank of India under its special concessional forex swap scheme.The sharp decline in funding costs highlights the impact of the RBI’s FCNR(B) window. By swapping $127.23 billion of FCNR(B) deposits with the RBI, banks drew substantial rupee liquidity, curbing their need for CD funding.Liquidity impactThe liquidity impact has been most pronounced among large banks, which were the principal beneficiaries of the FCNR(B) scheme. Armed with fresh three-to-five-year FCNR(B) deposits and access to the RBI’s concessional swap facility, these lenders have little incentive to access the CD market for near-term funding requirements.“The excess liquidity is creating an interesting situation in the money market, with large banks not needing to raise much money, and at the same time, investors are sitting on large amounts of liquidity, looking for avenues to deploy it,” said Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincap LLP.He said the impact is clearly visible in market rates, with three-month CDs of top-rated banks trading as low as 5.80 per cent compared with levels above 7 per cent earlier.“Banks which don’t need the money simply don’t come to the market, while banks which need to refinance or raise short-term funds are able to borrow at much cheaper rates as there is so much liquidity chasing bank paper. For larger banks, this is a good opportunity to refinance existing CDs and other relatively expensive short-term borrowings,” he added.Key issuersIn contrast, mid-size and smaller banks are expected to emerge as the key issuers in the CD market in the coming months. Unlike their larger peers, many of them were unable to garner substantial FCNR(B) inflows because they lacked the balance-sheet strength and customer relationships needed to provide leverage or standby letters of credit sought by NRI depositors. With FCNR(B) liquidity concentrated among bigger lenders, these banks are likely to use the softer rate environment to raise short-term funds through CDs.“For other banks, regular access to the CD market also helps them build and widen their institutional investor base. For these banks, therefore, it is not just about raising money. It is also about building relationships with mutual funds, banks, financial institutions and other institutional investors, while getting access to cheaper short-term funding,” Venkatakrishnan said.With surplus liquidity at ₹10.31 lakh crore and set to rise further as banks complete FCNR(B) swaps, CD rates are expected to remain soft. While large banks may stay away from the market, smaller lenders could use the low-rate environment to raise funds at significantly lower costs before liquidity conditions normalise.Published on September 6, 2026
