The Reserve Bank of India's recent measures to promote overseas fund raising could lower banks' borrowing costs via the external commercial borrowing (ECB) route by 2 to 2.5 percent, while also bolstering liquidity and foreign currency inflows, according to a report by Motilal Oswal Financial Services.
Impact of RBI's Concessional Swap Facility
The brokerage noted that the RBI's concessional USD/INR swap facility for ECBs and overseas foreign currency borrowings (OFCBs) would substantially reduce hedging costs, allowing banks to access overseas funds at more favorable rates.
“The borrowing cost for banks via the ECB route is expected to fall by 2-2.50 percent, which will enable the system to raise resources while keeping funding costs under control,” Motilal Oswal Financial Services stated in the report, as quoted by PTI.
Strengthening Forex Reserves and Liquidity
According to the brokerage, the central bank's measures concerning ECBs and Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits are likely to strengthen foreign exchange reserves, improve systemic liquidity, and provide temporary relief to lenders facing pressure on deposit mobilization.
Attractive Economics for FCNR(B) Deposits
The report highlighted that the revised framework offers appealing economics for both depositors and banks under the FCNR(B) scheme. It estimated that customers could earn returns of 15 to 26 percent on leveraged deposits, while banks may generate around 0.65 percent of additional spreads by deploying such funds, making it a "win-win proposition."
The brokerage also noted that several banks have already increased FCNR(B) deposit rates in the three-to-five-year maturity bucket to 6-7 percent to attract inflows after the RBI opened a special swap window valid until the end of September.
