MUMBAI — Short-term borrowing costs for Indian lenders climbed at their fastest pace in a month after the Reserve Bank of India (RBI) announced an early closure of its overseas deposit facility, removing a stable and cheaper source of liquidity for the banking sector.
Rates on three-month certificates of deposit (CDs) rose 16 basis points to 6.59 per cent, marking the largest increase since July 14, according to data compiled by Bloomberg. Meanwhile, six-month rates were headed for their steepest weekly gain since July 10. Certificates of deposit are short-term debt instruments that mature within one year.
The central bank surprised markets by announcing it would shut down a special dollar deposit window for overseas residents on August 31. The facility had previously drawn more than $50 billion. Lenders had utilized these foreign inflows to fund robust loan growth while replacing more expensive domestic CDs.
Market participants anticipate further upward pressure on rates. Anshul Chandak, head of treasury at RBL Bank Ltd., noted that money-market rates are expected to rise by another 5 basis points before stabilizing, adding that CD issuances are likely to pick up after a brief lag.
Strong foreign deposit inflows had previously depressed short-term debt issuance. RBI data shows that banks sold ₹57,120 crore ($6 billion) of short-term debt in the fortnight ended July 31, a significant decline from approximately ₹1 trillion issued during the first 15 days of June.
Domestic banks have increasingly relied on CDs to finance ongoing loan demand because traditional term deposits have failed to keep pace as households shift their savings toward alternative investments. Central bank data indicates that bank loans grew by 19.3 per cent in the year through July 31 — reaching the highest level since May 2024 — compared with deposit growth of 15.4 per cent.
The special dollar deposit window was originally introduced on June 5, when the central bank announced it would fully bear hedging costs on foreign currency deposits to enable banks to offer attractive rates. The facility became operational on June 8 and attracted substantial inflows before its scheduled early termination.
"The early closure of the RBI's overseas deposit facility directly impacts the liquidity management strategies of Indian banks. With credit growth outpacing deposit growth, lenders will likely need to rely more heavily on domestic certificates of deposit to meet capital requirements. This shift will inevitably increase short-term borrowing costs, which businesses and entrepreneurs should monitor closely as it may influence broader lending rates across the financial ecosystem." — Dr. Shishir Gupta, Founder & CEO, StartupLanes
