$136 billion forex inflows ease banking liquidity, lift credit growth outlook: Report

Indian banks have attracted $136.4 billion in foreign-currency inflows under two forex swap facilities announced by the Reserve Bank of India (RBI) in June, exceeding market expectations and providing a temporary boost to banking-system liquidity, deposits, and foreign exchange reserves.

According to a report by Motilal Oswal Financial Services, the inflows comprise $127.2 billion through Foreign Currency Non-Resident (Bank) or FCNR(B) deposits and another $9.1 billion through overseas foreign currency bonds (OFCBs) and external commercial borrowings (ECBs).

The scale of the inflows has helped push surplus net banking-system liquidity above ₹6 lakh crore as of August 31, the highest level in four months. Deposit growth has also accelerated to 14.7% year-on-year as of August 15, compared with 12-13% in the earlier part of FY27.

FCNR(B) deposits exceed expectations

The RBI had introduced a special window from June 8, initially scheduled to remain open until September 30, allowing banks to raise FCNR(B) deposits with maturities of three to five years and swap the foreign currency into rupees. The RBI bore the associated hedging cost, while the deposits were exempted from cash reserve ratio and statutory liquidity ratio requirements.

The incentives prompted banks to raise FCNR(B) deposit rates by around 200-300 basis points, taking them from roughly 3-4% to 6-7%. Banks also used their overseas balance sheets to offer leverage to depositors, resulting in an estimated $127.2 billion of FCNR(B) inflows.

The RBI subsequently closed the window early on August 31. The FCNR(B) inflows represented around 4.5% of banks' outstanding deposit base as of August 15, providing substantial temporary relief to banks facing deposit-mobilisation and liquidity pressures.

Among domestic lenders, ICICI Bank mobilised $17.9 billion, equivalent to about ₹1.7 lakh crore, giving it a 14% share of total FCNR(B) inflows. State Bank of India (SBI) had raised about $9 billion shortly before the window closed and was expected to exceed its $10 billion guidance.

RBL Bank mobilised $3.4 billion, accounting for 2.7% of total FCNR(B) inflows. That compares favourably with its overall deposit-market share of roughly 0.5%.

Foreign banks were also significant beneficiaries. RBI data as of July 30 showed HSBC leading with $6.1 billion, or 22% of the inflows, followed by Standard Chartered with $1.9 billion, or 7%. Kotak Mahindra Bank, Axis Bank and HDFC Bank mobilised $1.7 billion, $1.6 billion and $1.4 billion, respectively.

Dollar borrowings add to inflows

Banks have also stepped up dollar-denominated borrowing following the RBI's relaxation of hedging requirements and associated costs. They have raised around $12.2 billion through dollar bonds, with ICICI Bank, HDFC Bank, Bank of Baroda, and SBI accounting for $3.6 billion, $2.5 billion, $1.1 billion and $1.1 billion, respectively.

While not all these borrowings are necessarily covered by the swap facility, Motilal Oswal expects a significant portion to support leverage facilities offered to FCNR(B) depositors. The OFCB and ECB window remains open until December 31, potentially allowing additional foreign-currency inflows into the banking system.

Forex reserves hit record high

The inflows have also strengthened India's foreign exchange reserves. Reserves rose from $672 billion on June 12 to a record $729 billion on August 21, representing a net increase of $58 billion.

Foreign portfolio investor (FPI) flows have shown a similar turnaround. After selling about $47 billion between calendar 2024 and June 2026 amid uncertain global macroeconomic conditions and stronger investment opportunities elsewhere in emerging Asia, FPIs recorded net inflows of $4.8 billion over the subsequent two months. The reversal in foreign flows, combined with the RBI's measures to encourage overseas borrowing and FCNR(B) deposits, has also helped stabilise the rupee against the US dollar.

Credit growth expected to accelerate

The surge in foreign-currency deposits has helped lower the banking system's loan-to-deposit ratio to 81.9% from 82.7% in May, while easing near-term liquidity and deposit mobilisation pressures.

However, the benefit to profitability could be mixed. Net interest margins (NIMs) are likely to remain under pressure in the near term because of the relatively limited spread on the overseas leveraged portion of FCNR(B) deposits. Over time, though, deployment of these funds and an improving asset mix could accelerate balance-sheet growth and support earnings.

Motilal Oswal remains positive on systemic credit growth and has raised its growth projection to 14.3% year-on-year, while acknowledging upside risks. The brokerage estimates that system credit growth could rise by around 150 basis points to 15.5-16% in FY27.