Short-term funds for Indian lenders may turn expensive after early closure of FX deposit scheme

Mumbai: The cost of short-term funds for Indian lenders may rise again soon after the unexpected closure of a non-resident deposit scheme. This early termination could force banks to increasingly rely on these funds to maintain liquidity in the coming month. The three-month benchmark rate for certificates of deposit (CDs) has risen, with the spread over similar maturity treasury bill yield reaching 130 basis points, a significant increase from the low of 110 bps observed last week.

The Reserve Bank of India abruptly ended its zero-cost foreign exchange swap facility for banks by a month, extending it until August 31, following a surge in inflows exceeding $50 billion. Outstanding CDs surged to a record high of 7.03 trillion rupees ($73.47 billion) by July 31, up about 25% from the end of December. While traders anticipate a decline in CD issuance in August, they predict another surge in September.

India’s inaugural blue bond issuance is imminent, according to bankers. CD issuances are anticipated to rise in September compared to August due to banks' increased refinancing needs of approximately 2.25 trillion rupees. In March, banks' funding costs had surged to a six-year high of 210 basis points. Basant Bafna, head of fixed income at Mirae Asset Investment Managers (India), noted that money markets remain appealing, with spreads still higher than historical averages, and flows projected to stay robust.

Money market funds attracted inflows of nearly 212 billion rupees in July, the highest since April 2025, according to AMFI data.