RBI’s Deposit Push Slows Bank's Debt Issuance: Short-Term Funds Face Competition from Cheaper Foreign Cash

RBI’s Deposit Push Slows Bank's Debt Issuance: Short-Term Funds Face Competition from Cheaper Foreign Cash​

Indian banks are significantly reducing their short-term debt sales as the Reserve Bank of India (RBI) continues its concerted effort to attract foreign-currency deposits. This move has introduced a cheaper and more stable source of funding, lessening the immediate need for banks to issue Certificates of Deposit (CD).

Data from The Clearing Corp. of India Ltd. indicates that no bank issued any CDs in the three trading sessions through July 2. This pause follows a decline in issuance activity during June.

Decline in Short-Term Debt Sales​

Banks raised 708 billion rupees ($7.4 billion) between June 16 and June 29, which was lower compared to the approximately one trillion rupees raised during the first half of that month. The slowdown in CD issuance is particularly notable as banks typically rely on these instruments to strengthen their balance sheets leading up to quarter-end.

The second half of June saw a decline of about 19% in issuance when compared against the 872 billion rupees raised a year prior, according to CCIL data.

Foreign Deposits Offer Cheaper Alternative​

Bank executives anticipate that this subdued trend will persist until September. This expectation is based on the Reserve Bank's strategy launched in June, which aims to absorb hedging costs incurred by lenders who raise dollars overseas. The central bank’s push is expected to attract more than $50 billion.

This influx of foreign capital provides banks with a financially superior alternative to relying heavily on CD issuances to fund loan growth, which has consistently outpaced deposit mobilization needs.

Competitive Dynamics in Funding Costs​

The cost associated with borrowing through short-term debt instruments has already seen a decline. The rate for one-year CDs eased to 6.84% on Thursday from a high of 7.96% recorded in May, according to Bloomberg data.

In contrast, banks are offering foreign-currency deposits at rates up to 7.75% for maturities ranging from three to five years. This differential highlights the stability and cost advantage offered by the foreign deposit market.

Expert View: Stability Trumps Debt Issuance​

Financial experts have noted that the steady inflow of foreign-currency funds is a shift in bank funding strategy. Alok Singh, head of treasury at CSB Bank Ltd., described these flows as "a more stable, permanent cash flow."

He added that CD issuances are expected to remain subdued until August or September, and he suggests that rates could potentially fall another 20 to 25 basis points from current levels. Similarly, Anshul Chandak of RBL Bank Ltd. stated that banks will refrain from over-issuing CDs while anticipating sustained foreign currency flows.