FCNR inflows drive short-term borrowing costs lower as banking liquidity rises: ICICI Bank

A surge in foreign currency non-resident, or FCNR (B), inflows has pushed India’s short-term borrowing costs sharply lower, according to ICICI Bank Research. Three-month certificate of deposit rates have fallen by more than 100 basis points from their peak this year.

The impact has been strongest in short-term money markets, where rates have moved below the policy repo rate. Six-month and one-year certificate of deposit rates have also dropped by about 100 and 90 basis points, respectively, from their earlier peaks.

Gross FCNR (B) inflows have reached about $127 billion, significantly altering the liquidity outlook for the rest of the financial year. Average system liquidity stood at about INR 1.6 lakh crore, or 0.6% of net demand and time liabilities, in May 2026. It rose to INR 3.7 lakh crore, or 1.3% of NDTL, in August, and has now reached about INR 10.5 lakh crore, or 3.9% of NDTL.

ICICI Bank expects liquidity to remain high in the coming months. Even after accounting for seasonal demand for currency and reserve balances, it projects a banking-system surplus of about 2.5% of NDTL by March.

The report warned that the effects could extend beyond short-term borrowing costs. It cited a 0.50 correlation between system liquidity and core consumer inflation with a 12-month lag, rising to 0.62 when precious metals are excluded. “Today’s liquidity has an impact on ‘future’ inflation,” ICICI Bank Research said. The bank forecasts headline inflation at 4.5% in fiscal 2028 and core inflation excluding precious metals at about 4%.

Against that backdrop, the bank said some permanent liquidity absorption may be needed alongside temporary measures. It identified long-term variable rate reverse repo operations as a flexible tool for absorbing excess funds while allowing their later release. ICICI Bank also expects a shallow rate-hike cycle, with a 50-basis-point increase likely to move real rates toward the lower end of the neutral range. If inflation rises above its current path, it said a 75-basis-point increase would be enough to bring real rates into the neutral band.

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Today’s liquidity has an impact on ‘future’ inflation.