The Reserve Bank of India's new Foreign Currency Non-Resident (FCNR) deposit rules are anticipated to significantly enhance bank deposit growth, potentially adding 150-200 basis points, according to a report by Anand Rathi. This boost in liquidity is expected to drive credit growth of around 14-15 percent in the financial year 2026-27 (FY27), with industrial lending emerging as a primary demand driver, particularly amid the government's push to strengthen manufacturing in India.
RBI's Twin Forex Swap Facilities
The RBI has introduced twin forex swap facilities covering FCNR(B) deposits. Under this arrangement, the central bank will absorb hedging costs on FCNR(B) deposits with maturities of 3 to 5 years raised until September 30, 2026. Additionally, these deposits will be exempt from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements. This enables banks to offer more attractive FCNR(B) deposit rates, ranging up to approximately 6-7.1 percent.
Strong Credit Growth Momentum
The banking sector continues to exhibit robust performance, with system credit growth surging 17.7 percent in May 2026, marking the ninth consecutive month of acceleration. Notably, public sector banks have outperformed their private sector counterparts for the seventh straight quarter, indicating a shift in market dynamics.
Deposit Growth vs. Credit Growth
Despite the overall positive trend, the report highlights a persistent gap between deposit and credit growth. "While deposit growth improved to Rs 12.2 percent in May-26, it lagged credit growth," the report noted. This disparity underscores the need for enhanced deposit mobilization to sustain credit expansion.
Asset Quality and Profitability Trends
The gross slippage ratio improved by 9 basis points quarter-on-quarter and 35 basis points year-on-year, settling at 0.97 percent in Q4FY26. However, system net interest margins (NIMs) declined by approximately 5 basis points quarter-on-quarter in the same period, as loan yields eased following a 25 basis point repo rate cut in December 2025. Public sector banks experienced a more pronounced decline of about 6 basis points quarter-on-quarter, compared to a 3 basis point drop for private banks.
Regional Banks Outperform
In contrast, regional banks stood out with NIMs improving by roughly 24 basis points quarter-on-quarter, driven by a higher share of gold loans, which typically offer higher yields.
Cost of Funds and Future Outlook
The cost of funds (CoF) continued to moderate, with marginal weighted average domestic term deposit rates (WADTDR) easing by around 78 basis points since February 2025. This suggests meaningful room for further decline into FY27, offering incremental support to NIMs. Additionally, the report states that "there is higher probability of rate hike in CY26, which can improve the NIM."
Credit Growth Projections
Overall, Anand Rathi expects "new FCNR deposit rules to boost deposit growth by 150-200bps, which should lead to 14-15% credit growth in FY27e," the report said. However, the report also cautions about potential risks, including higher slippages in FY27/28 due to factors such as El Nino, crude prices, higher tariffs, and muted white-collar job growth, which could put pressure on asset quality.
