FCNR inflows may push FY27 loan growth to 16%; weaker-liability banks to benefit: Report
New Delhi, August 12
Foreign Currency Non-Resident inflows could boost system deposit growth by ~3 percentage points and loan growth by 3.7ppt, raising FY27 loan growth to 16%, while easing money-market rates are likely to benefit weaker-liability-franchise banks and wholesale-funded NBFCs, IIFL Capital said.
Highlighting that FCNR flows are running ahead of expectations, the brokerage noted that banks had mobilised USD 36.7 billion in fresh FCNR deposits as of July 31, surpassing USD 24.5 billion mobilised during the entire 2013 window, which represented 2 per cent of system deposits and 9 per cent of FCA. It stressed, "We expect FCNR flows to add ~3ppt to system deposit gr. (13.5% in FY27E) and 3.7ppt to loan gr. (16.1%)."
According to IIFL Capital, the faster uptake reflects the more liberal 2026 framework, including principal swaps at par, implying zero hedging costs for banks versus 3.5% annually in 2013, and the extension of eligibility to rollovers and renewals, rather than only fresh deposits.
"Assuming a similar mobilisation run-rate over the remaining two months, we expect total mobilisation to be around USD 80 billion," it said.
Following the Foreign Currency Non-Resident (FCNR) announcement and relaxation for foreign portfolio investors (FPIs) in government securities, the Indian rupee has stabilised, while government security yields and money-market rates have eased by 20-65 basis points.
At the same time, banking system liquidity has surged to Rs 3.2 trillion and is expected to increase further with additional FCNR inflows by September 2026, although currency leakage and forward unwinds through March 2027 should largely offset the surplus, as per IIFL.
As a result, the brokerage house expects the Reserve Bank of India (RBI) to deploy temporary liquidity withdrawal tool such as variable rate reverse repo (VRRR) operations, rather than permanent measures such as open market operation (OMO) sales or an incremental cash reserve ratio (CRR) hike.
"Easing of money market rates bodes well for banks with weaker liability franchise and wholesale funded NBFCs," it noted, stressing, "We expect LDR to rise by 0.2- 1.6ppt and NIM to contract 3-15bps, it should drive PAT accretion of 1-9 per cent."
— ANI
Reader Comments
Interesting that they're projecting USD 80 billion in total mobilization. That's massive liquidity coming in. But I wonder about the long-term implications once these deposits mature in 2026-27. Will there be a sudden outflow that destabilizes the rupee again? Seems like a short-term fix.
The zero hedging cost is a game-changer! In 2013, banks had to pay 3.5% annually for hedging, which made FCNR less attractive. Now with principal swaps at par, it's a no-brainer for banks. Smart policy design by the RBI. This should help smaller banks too. 📈
I'm cautiously optimistic but remember - what goes up must come down. These FCNR deposits are essentially external debt that needs to be repaid. If the rupee depreciates significantly before maturity, the cost to banks could be substantial. Hope the RBI has a clear exit strategy.
As someone who works in a mid-sized PSU bank, this report makes sense. We're already seeing better deposit mobilization from NRI clients. The easing money market rates should help us compete with the bigger private banks. Good times ahead hopefully! 🙏
The report mentions PAT accretion of 1-9% for banks. That's a wide range. While larger banks with strong liability franchises will benefit less, smaller banks with weaker deposit bases could see significant bottom-line improvement. This could reshape the competitive landscape in Indian banking.
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