Record foreign currency inflows into Indian banks, particularly through the Reserve Bank of India’s (RBI) special USD-INR swap facility, have boosted deposits. However, SBI Research indicates that these headline numbers may overstate the actual liquidity available for lending within the banking system.
FCNR Inflows and Limited Deployable Funds
As of September 18, total forex inflows under the RBI's special swap facility reached an impressive $143.5 billion, with Foreign Currency Non-Resident (Bank) or FCNR(B) deposits accounting for $132.9 billion. While these inflows have undeniably increased bank deposits, SBI Research argues that the resulting increase does not translate directly into deployable liquidity for new loans.
Regulatory Constraints and Digital Payments
Several factors constrain how much of these deposits banks can actually lend:
- Cash Reserve Ratio (CRR): A portion of deposits must be held with the RBI.
- Statutory Liquidity Ratio (SLR): Banks must maintain a percentage of deposits in liquid assets like government securities.
- Liquidity Coverage Ratio (LCR): Banks must hold sufficient high-quality liquid assets to cover short-term liabilities.
These regulatory frameworks mean a significant part of additional deposits must remain either with the central bank or in prescribed liquid assets, rather than being disbursed as fresh credit. Furthermore, the report highlights the impact of digital payment systems like Unified Payments Interface (UPI) and the System for Pension Administration (SNA-Sparsh) on the banking system’s operating multiplier, further limiting effective liquidity creation.
The ₹8.2 Lakh Crore Deposit Gap
SBI Research projects a credit growth of 16% in FY27, requiring approximately ₹34 lakh crore in incremental credit. While incremental deposits are estimated at ₹40 lakh crore (assuming 15.5% deposit growth), accounting for CRR, SLR, LCR, UPI, and Sparsh requirements, the system would need around ₹48.2 lakh crore of incremental deposits to support this credit expansion.
This calculation reveals an estimated ₹8.2 lakh crore deposit gap, even after factoring in the substantial FCNR inflows. This suggests that despite the record FCNR(B) mobilization, its impact on expanding banks' lending capacity is not as direct or abundant as the headline figures might imply.
Liquidity Normalization Expected
Despite the current constraints, SBI Research anticipates an automatic adjustment in the liquidity position as regulatory requirements work through the banking system. The report forecasts core surplus liquidity to decline from ₹13.9 lakh crore on September 15 to about ₹7 lakh crore by December-end, further reducing to approximately ₹3.5 lakh crore by March 2027.
The assessment underscores that while FCNR(B) inflows have aided banks in funding recent credit growth, the broader liquidity impact must be understood beyond just the headline increase in deposits.