Bank stocks rally as RBI pushes for forex assets

MUMBAI: Bank stocks surged across the board on Tuesday following RBI’s operational guidelines for a special foreign currency non-resident (bank) or FCNR(B), swap window, with public sector lenders leading the rally. Bank of Baroda rose 5.7%, Canara Bank 4.3%, and Punjab National Bank 3.7%, while Bankex, BSE’s index for the sector, climbed 2.2% against a more modest 0.5% gain in the sensex.

In the broader market, a relatively calm West Asia stabilised global markets, oil prices fell about 3%, rupee strengthened by 35 paise to 95.36-to-the-dollar and sensex closed 395 points (0.5%) up at 73,919 points.

Banks and analysts see the RBI’s scheme as a positive development for banks, addressing a persistent imbalance where credit growth has consistently outpaced deposits. By permitting banks to swap fresh three-to-five-year foreign currency deposits with the central bank at par, RBI is in effect absorbing the entire hedging cost, historically in the range of 2.5% to 3.5% annually. Coupled with exemptions from Cash Reserve Ratio and Statutory Liquidity Ratio requirements, the framework allows lenders to expand their dollar-denominated liabilities aggressively and offer competitive rates to non-resident Indian depositors without eroding net interest margins.

If banks succeed in raising the estimated $50 billion through the FCNR(B) route, this would translate into nearly Rs 5 lakh crore of additional deposits. Markets expect substantial inflows as the instrument resembles quasi-sovereign borrowing: The exchange rate risk is borne by the central bank, and although deposits are routed through NRIs, much of the funding is expected to originate from foreign banks that lend to these investors.