Bank shares gained on Thursday, following an overwhelming forex inflow under the RBI’s Foreign Currency Non-Resident (bank) (FCNR(B)) scheme that closed on August 30.
The FCNR(B) scheme allowed Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) to maintain fixed deposits in approved foreign currencies with banks in India. The interest rate was not subject to tax under Indian tax laws.
The NSE Nifty Bank index on Thursday rose 581 points to a high of 57,753.60 from a previous close of 57,172.00. HDFC Bank, Axis Bank, IndusInd Bank, ICICI Bank and IDFC First Bank were the major winners, gaining in the range of 0.4 to 3 per cent.
The climb in bank stocks is attributed to increased surplus liquidity in the banking system, which is expected to aid credit growth. The Indian rupee also rose 0.5% versus the U.S. dollar, to 94.54.
According to Reuters, India attracted a massive $136.38 billion in foreign exchange inflows through the RBI’S swap facility, with FCNR(B) deposits accounting for $127.2 billion.
Motilal Oswal Financial Services said, “Among banks, ICICIBC has mobilised $17.9 billion of FCNR(B) deposits, capturing 14 per cent market share of the total FCNR(B) inflows. SBI has garnered $9 billion a few days prior to the close and is expected to beat its $10 billion guidance. RBL Bank has added $3.4 billion, capturing 2.7 per cent share, better than its deposit market share of 0.5 per cent.”
However, an unchecked flood of foreign money threatens to fuel inflation. The excessive surge in local liquidity can drive up asset prices and directly counter the intention of the policy.
Hence, with the highest surplus liquidity at ₹6.65 trillion since April 2022, the RBI conducted a Variable Rate Reverse Repo (VRRR) auction on Thursday. VRRR auctions allow the RBI to temporarily withdraw extra money from the banking system. Through the auction, banks will park their money with the central bank at market-determined rates.
These measures might decrease the liquidity available for credit lending in the future. However, banks placed only ₹34,652 crore out of the ₹1,50,000 crore offered, maintaining the possibility for credit growth.
