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New FCNR deposit rules are expected to lift bank deposit growth by 150-200 basis points, supporting stronger liquidity and driving credit growth of around 14-15 per cent in FY27, with industrial lending likely to emerge as a key demand driver amid government push to boost manufacturing in India, says Anand Rathi.
The RBI's recently announced twin forex swap facilities cover FCNR(B) deposits. Under this arrangement, the central bank will absorb hedging costs on FCNR(B) deposits with 3-5 year maturities raised until September 30, 2026, along with an exemption from CRR and SLR requirements on such deposits. This allows banks to offer more attractive FCNR(B) deposit rates of up to around 6-7.1 per cent. Noting the banking sector's continued healthy performance, the report said system credit growth surged 17.7 per cent in May, marking its ninth consecutive month of acceleration. Notably, the public sector banks have outperformed the private sector banks for the seventh straight quarter. However, "while deposit growth improved to ~12.2 per cent in May-26, it lagged credit growth," the report said. Gross slippage ratio improved by ~9bps q/q and ~35bps y/y to ~0.97 per cent in Q4FY26. On profitability, the report said system net interest margins (NIMs) declined by around 5 basis points quarter-on-quarter in Q4FY26, as loan yields eased following a 25 basis point repo rate cut in December 2025. Public sector banks were more impacted, recording a fall of about 6 basis points quarter-on-quarter, compared with a decline of around 3 basis points for private banks. 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. 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, indicating meaningful room for further decline into FY27 and offering incremental support to net interest margins (NIMs). Additionally, "there is higher probability of rate hike in CY26, which can improve the NIM," the report said. Oerall, 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, there are changes of higher slippages in FY27/28e, as "El Nino, crude prices and higher tariffs and muted white collar job growth could put some pressure on asset quality." (ANI)
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