FCNR(B) Inflows Cool CD Rates: Why Big Banks Are Staying Away

What's Happening in the Money Markets

India's short-term funding market has shifted noticeably over the past few months. Certificate of Deposit (CD) issuances — short-term money market instruments banks use to borrow, with maturities ranging from seven days to a year — have plunged, and the rates banks pay on them have softened sharply, as a wave of FCNR(B) (Foreign Currency Non-Resident Bank) deposits has flooded the banking system with liquidity.

The Numbers Tell the Story

According to Prime Database, CD issuance peaked in June as banks scrambled to shore up liquidity amid tight funding conditions and a widening credit-deposit growth gap — credit was growing considerably faster than deposits, pushing banks toward the CD market to bridge the gap. Since then, issuance has fallen for two straight months, with August's ₹68,130 crore the lowest level since April.

Rates have moved in tandem:

• CD rates have softened by roughly 70 basis points since the end of June, per initial July data
• Three-month CD rates fell 90 basis points in August alone, while six-month CD rates fell 50 basis points over the same period
• As of September 3, 2026, the three-month CD rate stood at 5.9%, down from 6.8% just a month earlier

Why: The FCNR(B) Special Swap Window

The driving force behind this shift is the RBI's special FCNR(B) swap facility, announced on June 8, 2026, which encouraged banks to mobilise fresh dollar deposits from NRIs ahead of an August 31, 2026 deadline. This scheme has been remarkably effective at bringing dollar liquidity into the system — and every rupee of that liquidity is a rupee banks don't need to raise through costlier instruments like CDs.

ICICI Bank's disclosure gives a sense of scale: the bank mobilised approximately $17.88 billion (₹1.70 lakh crore) through FCNR(B) deposits under the scheme by the August 31 deadline. Of this, the bank's international branches and subsidiaries extended around $9 billion (₹85,600 crore) in loans against these deposits, and issued standby letters of credit worth roughly $3.63 billion (₹34,600 crore) to other banks against loans backed by the deposits — the same leveraged mechanism covered in earlier coverage of how NRIs have used this scheme to amplify their own returns.

Brokerage house Jefferies estimates that surplus system liquidity has risen to ₹10 lakh crore, and could climb further as more FCNR(B) money continues entering the system.

Why Large Banks Are Stepping Back

This is where the "large banks stay away" part of the story comes in. Banks that have successfully mobilised substantial FCNR(B) deposits — typically larger banks with meaningful international branch networks and deposit-taking capability abroad, like ICICI Bank in the example above — now have considerably less need to tap the CD market to fund their balance sheets. Since these large banks were historically among the more active CD issuers (given their scale of wholesale borrowing requirements), their reduced participation is a meaningful driver of both the falling issuance volumes and the softening rates across the market.

Banking officials expect this to translate into real, measurable benefits for the institutions best positioned to capture FCNR(B) inflows:

• Cost of funds could fall by up to 50 basis points, reducing reliance on higher-cost CDs
• Liquidity Coverage Ratios (LCR) may improve by up to 1 percentage point
• The surplus liquidity is expected to support credit expansion, particularly short-term lending, and allow refinancing agencies to prepay costlier existing loans

Will This Last?

Bankers quoted on this trend suggest the effect could persist for some time, though its duration hinges on how much FCNR(B) deposit stock banks were able to build before the September-end deadline (referring to related mobilisation timelines tied to the scheme). If banks succeed in building a sizeable FCNR(B) deposit base, they're likely to remain comfortably funded through October and November, reducing the need for fresh CD issuance even after the special window closes — meaning both CD volumes and rates could stay subdued well beyond the current quarter.

That said, one banker also cautioned against over-attributing the entire move to FCNR(B) alone — CD rates typically soften somewhat after the fourth quarter (Jan-March) each year as part of a normal seasonal pattern, meaning some portion of the current decline may reflect this recurring cycle layered on top of the FCNR(B)-driven liquidity surge, rather than the scheme's effect in isolation.

Why This Matters Beyond the Banking Sector

For a broader audience, this story is a useful window into how a single RBI policy tool — a special swap window aimed at attracting NRI deposits — can ripple through the entire domestic money market, affecting short-term borrowing costs for banks, corporate treasury decisions, and ultimately the rates offered on retail products like fixed deposits and short-duration debt mutual funds, all of which are influenced by the broader money-market rate environment that CD rates help anchor.