The RBI's decision to end its special foreign-currency deposit facility for overseas residents on Aug. 31, ahead of schedule, caught markets off guard. The program had pulled in over $50 billion, giving banks a cheap source of funds to support strong loan demand.
Banks had been using the foreign deposits to replace the use of costlier certificates of deposit, or CDs, which are short-term debt instruments maturing within one year. With the window shut, they are back to borrowing in the open market.
The shift showed up quickly. Three-month CD rates touched 6.59% on Thursday, up 16 basis points, the largest monthly jump since July 14. Six-month CD rates are heading for their biggest weekly but inclusion since July 10.
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RBL Bank's head of treasury, Anshul Chandak, expects money-market rates to climb another 5 basis points before turning. "The next round will be tempered," he said. To make up for the shortage, banks will likely issue more CDs, but Chandak said that issuance will come "after a lag."
The foreign deposits were attractive because banks needed a way to fund loans without relying on conventional deposits alone. In the year through July 31, bank loans grew 19.3%, the fastest pace since May 2024. Deposits grew just 15.4% in the same period.
That gap is why banks had turned to CDs. In the two weeks ending July 31, banks issued short-term debt of 571.2 billion rupees, about $6 billion, down from roughly 1 trillion rupees in the first half of June. The foreign window had kept CD issuance low because banks could borrow more cheaply abroad.
For context, the RBI announced the facility on June 5 and launched it on June 8. The central bank absorbed currency-hedging costs on foreign deposits, removing a major barrier to cheaper offshore funding. That is why the program attracted more than $50 billion in about three months. With the facility closed before the holiday season, the mismatch between 19.3% loan growth and 15.4% deposit growth is exposed again, and the CD market is signaling that renewed stress.
The RBI initially announced the special window on June 5, saying it would cover hedging costs so banks could offer competitive rates. The window became operational June 8 and quickly became a favorite. With it gone, banks have to pay more to borrow, and that cost may eventually reach consumers.
That could show up as slightly higher interest rates on car loans, home loans, or personal borrowings. There is no need to panic, but it is a reminder that a move by a central bank in India can still reach your wallet.
Banks still need to fund a level of loan demand that is growing faster than deposits. They will likely lean heavily on short-term borrowing through CDs and similar money-market instruments. The cheap overseas window is now closed, so those short-term funds will cost more.
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