Indian lenders face rising short-term funding costs following the Reserve Bank of India’s early closure of its foreign-exchange deposit scheme, prompting a shift in liquidity and credit markets despite continued investor appetite for short-term instruments.
Indian lenders are likely to see a renewed rise in short-term borrowing costs after a brief easing, as the early closure of the central bank’s foreign-exchange deposit scheme removes an important source of cheap funding and pushes banks back into the market for liquidity. Reuters reported that the spread between the FBIL three-month certificate of deposit benchmark and similar-maturity Treasury bills widened to 130 basis points after touching a more than five-week low of 110 basis points last week, underscoring how quickly pricing can shift when demand for funds picks up.
The Reserve Bank of India ended its zero-cost FX swap facility for banks a month earlier than planned, on 31 August, after more than $50 billion of inflows. That has left the market expecting certificate of deposit issuance to soften in August before rising again in September, when refinancing needs are likely to climb. Basant Bafna, head of fixed income at Mirae Asset Investment Managers India, told Reuters that issuance should increase next month because banks face refinancing requirements of about 2.25 trillion rupees.
The volumes already point to a market under strain. Outstanding certificates of deposit reached a record 7.03 trillion rupees as of 31 July, up almost 25 per cent from the end of December, according to Reuters. Even so, money-market products remain in favour with investors: AMFI data show money-market funds attracted nearly 212 billion rupees in July, their strongest monthly inflow since April 2025. Broader mutual-fund figures from AMFI also show that equity fund inflows, SIP collections and other categories continued to draw steady money in July, suggesting that Indian savers still have ample appetite for short-dated and market-linked products despite the cost pressures building in bank funding.
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