Banks’ certificate-of-deposit rates fall as FCNR inflows reach $127 billion

A surge of foreign-currency deposits has pushed down the short-term rates Indian banks pay to raise funds, after a Reserve Bank of India scheme drew $136.4 billion from overseas sources.

Three-month certificate-of-deposit rates fell to 6.3%, according to data from inter-dealer broker Crest Finserv. Rates stood at 7.09% to 7.23% when the RBI announced the scheme on June 5, and at 7.30% to 8% at the end of March.

The FCNR(B) component, aimed at attracting dollar deposits from non-resident Indians, accounted for $127.2 billion, or about 93.3% of the total. Overseas foreign-currency borrowings contributed $5.3 billion, while external commercial borrowings added $3.9 billion. System liquidity rose to 7.8 lakh crore rupees on Sept. 1, from 1.85 lakh crore rupees on June 5.

Banks have consequently reduced their reliance on certificates of deposit, short-term debt instruments typically sold to institutional investors. In August, they raised 68,130 crore rupees through CDs, compared with 95,945 crore rupees in July. Central Bank of India issued 1,000 crore rupees in CDs maturing Dec. 2 at 6.38% on Tuesday, after raising 500 crore rupees at 6.60% for a similar maturity on Aug. 27.

The RBI’s scheme allowed banks to offer rates of up to 7.10% on three- to five-year foreign-currency deposits for non-resident Indians while covering their currency-exchange costs. It also permitted leveraged deposits. Gopal Tripathi, treasury head at Jana Small Finance Bank, said banks now had less need to use the CD market because FCNR(B) inflows had left them flush with funds.

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CD rates have fallen because banks are flush with FCNR(B) inflows and overall system liquidity has risen substantially, reducing their need to raise funds through CDs. Lower issuance is also putting downward pressure on CD rates.