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

MUMBAI: A fall in premiums that Indian lenders shell out for short-term funding is set to be short-lived as an early closure of the non-resident deposit scheme may push lenders to rely on these funds to meet liquidity needs in a month’s time.

The FBIL three-month benchmark rate for certificates of deposits moved higher, and the spread over similar maturity treasury bill yield touched 130 basis points, after easing to an over five-week low of 110 bps last week.

The Reserve Bank of India cut short its zero-cost FX swap facility for banks by a month to August 31, after inflows of over $50 billion.

Outstanding CDs had skyrocketed to a record high of 7.03 trillion rupees ($73.47 billion) till July 31, registering a staggering jump of almost 25% over December end.

Traders, however, expect the figure to ease in August, before jumping in September again.

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“CD issuances are expected to increase in September vis-a-vis August given higher refinancing requirements of around 2.25 trillion rupees for banks,” Basant Bafna, head of fixed income at Mirae Asset Investment Managers (India).

In March, the spread that banks pay to access funds had jumped to six-year high of 210 basis points.

Bafna said the money markets remain attractive with spreads continuing to be higher than historical averages with flows expected to remain robust.

Money market funds witnessed inflows worth nearly 212 billion rupees in July, which was the highest since April 2025, AMFI data shows.