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Fresh foreign-currency deposits from non-resident Indians (NRIs) could first help Indian banks lower their funding costs before becoming a major source of financing for the country’s next investment cycle, according to Axis Bank Managing Director and CEO Amitabh Chaudhry.
The comments come as Indian lenders gear up to tap billions of dollars from the Indian diaspora following the Reserve Bank of India’s (RBI) latest policy move, which absorbs the hedging costs incurred by banks raising foreign-currency deposits overseas. The initiative is designed to attract dollar inflows, support the rupee and ease funding pressures on lenders at a time when loan growth continues to outpace deposits.
“The first thing banks will do is reduce or pause growth in other very expensive deposits for some time,” Chaudhry told Bloomberg in an interview.
Once banks improve their funding profile, the fresh capital is expected to flow into sectors driving India’s economic expansion.
“Following that, the quickest areas for deployment would be across infrastructure projects, data-centre investments, commercial real estate and large capital-expenditure plans,” he said.
RBI taps the Indian diaspora
The RBI’s latest initiative is the newest example of India turning to its vast overseas community during periods of financial stress.
Home to an estimated 37 million overseas Indians, the diaspora spans major financial hubs such as the United States, the United Kingdom, Singapore and Hong Kong, as well as the Gulf countries, where millions of Indian professionals and workers continue to send billions of dollars home every year.
Under the new scheme, the RBI will absorb the cost of hedging foreign-currency deposits with maturities of three to five years. That allows banks to offer overseas Indians relatively attractive returns while shielding them from currency risk.
The deposits are now being actively marketed by Indian banks, with interest rates reportedly ranging between 6 and 7 per cent, making them significantly more attractive than many comparable dollar deposit products overseas.
Chaudhry expects the largest share of inflows to come from the Gulf region, followed by Southeast Asia.
Billions of dollars could flow into India
Market estimates suggest the programme could become one of India’s biggest overseas fundraising exercises in years.
Analysts and economists cited by Bloomberg estimate the scheme could attract nearly $50 billion in fresh deposits.
However, projections vary widely. Japanese brokerage Nomura estimates inflows of around $55 billion, while Axis Bank believes the opportunity could be as large as $100 billion if participation remains strong.
Macquarie analysts estimate banks could attract between $30 billion and $50 billion, particularly if lenders receive regulatory approval to offer dollar-denominated loans against these deposits through overseas branches or Gujarat’s GIFT City.
Such leverage could potentially lift investor returns to around 12 per cent, while Axis Bank estimates returns could reach as high as 15 per cent at higher leverage levels.
Banks seen as biggest beneficiaries
For Indian banks, the scheme offers more than just fresh deposits.
The banking sector has been grappling with slowing deposit growth even as credit demand remains robust, forcing lenders to rely increasingly on expensive wholesale funding.
According to RBI data cited by Bloomberg, loans expanded 18 per cent in the two weeks ended May 31 — the fastest pace in nearly two years — while deposits grew only 12 per cent over the same period.
The mismatch has pushed funding costs higher, with three-month certificates of deposit issued in March carrying yields of up to 7.5250 per cent.
The expected inflow of NRI deposits could help reverse that trend by improving liquidity, lowering funding costs and easing pressure on banks’ loan-to-deposit ratios.
Analysts at Ambit Capital believe the deposits are particularly attractive because they are exempt from reserve requirements, making them a more efficient source of funding while supporting banks’ lending margins.
The benefits have already been reflected in equity markets. The Nifty Bank index has gained more than 7 per cent over the past month, comfortably outperforming the broader Nifty 50 index, as investors bet the RBI’s support will improve profitability across the sector.
Banks with extensive overseas operations, including State Bank of India and HDFC Bank, are expected to be among the biggest beneficiaries.
Lower funding costs have also encouraged more companies to tap bond markets, as borrowing conditions gradually improve.
Not without risks
The policy, however, comes with potential trade-offs.
By bearing the hedging costs, the RBI could see a reduction in its own income, potentially limiting the annual surplus it transfers to the central government.
The central bank will also be required to return the dollars at the end of the deposit tenure, creating sizeable forward obligations that could generate future demand for dollars and partly offset the scheme’s near-term support for the rupee.
With inputs from agencies.
