MUMBAI: Bank stocks surged across the board on Tuesday following the Reserve Bank of India's (RBI) operational guidelines for a special foreign currency non-resident (bank) or FCNR(B) swap window, with public sector lenders leading the rally. Bank of Baroda rose 5.7%, Canara Bank gained 4.3%, and Punjab National Bank advanced 3.7%, while the Bankex, BSE's index for the banking sector, climbed 2.2% against a more modest 0.5% gain in the Sensex.
Market Context and Broader Impact
In the broader market, a relatively calm West Asia helped stabilize global markets. Oil prices fell about 3%, the rupee strengthened by 35 paise to 95.36 against the US dollar, and the Sensex closed 395 points (0.5%) higher at 73,919 points.
RBI's Scheme: A Positive Development for Banks
Banks and analysts view the RBI's scheme as a positive development for the banking sector, addressing a persistent imbalance where credit growth has consistently outpaced deposit growth. By permitting banks to swap fresh three-to-five-year foreign currency deposits with the central bank at par, the RBI is effectively absorbing the entire hedging cost, which historically ranged between 2.5% and 3.5% annually. Coupled with exemptions from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements, the framework allows lenders to expand their dollar-denominated liabilities aggressively and offer competitive rates to non-resident Indian (NRI) depositors without eroding net interest margins.
Expected Inflows and Market Optimism
If banks succeed in raising an estimated $50 billion through the FCNR(B) route, this would translate into nearly Rs 5 lakh crore of additional deposits. Markets expect substantial inflows as the instrument resembles quasi-sovereign borrowing: the exchange rate risk is borne by the central bank, and although deposits are routed through NRIs, much of the funding is expected to originate from foreign banks that lend to these investors.
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