IGI Logo

Expect inflows of USD40-50b; big banks well positioned to garner higher share of deposits

The RBI has announced twin forex swap facilities to encourage foreign capital flows, strengthen forex reserves and stabilize the USD/INR exchange rate.

* We believe these measures should provide temporary relief in deposit mobilization, improve systemic liquidity and strengthen FX reserves in the near term.

* The borrowing cost for banks via ECB route will likely fall by 200-250bp, which will enable the system to raise resources while keeping funding costs under control.

* We note that the RBI introduced a swap window on similar lines in Sep’13, which led to inflows of USD27b in FCNR (B) deposits and USD34b in NRI deposits in FY14. This helped strengthen FX reserves by USD12b in FY14, while average USD-INR also appreciated by 3.4%.

* FIIs have been on a selling spree in the recent months, and these measures, alongside a reduction in tax rates on capital gains in debt securities, will help arrest currency depreciation and aid FX reserves. We thus expect a near-term strengthening in the USD-INR rate to 93-94 levels.

* Overall, we estimate USD40-50b of FX inflows in FY27. We note that while these measures will aid business growth for the banking system, the improvement in profitability ratios will depend on the sourcing quality (mix of leveraged deposits vs. pure inflows), pricing discipline and the agility shown by banks in deploying these funds into loans. As per our interactions, the larger proportion of FCNR (B) deposits will be backed by leverage, and thus, banks with a large customer franchise and an overseas presence are better positioned to garner a higher share of inflows.

* Our analysis indicates that customers can earn 15-26% returns on such leveraged deposits, while banks will earn ~65bp higher spreads by deploying these deposits, making it a win-win proposition for everyone.

* Strong business growth, robust asset quality and a stable currency outlook will help ease FII selling pressure and enable an improved sector performance. Top ideas: ICICIBC, HDFCB, SBIN and AUBANK.

ECB and overseas foreign currency borrowing to also gain pace

* The RBI introduced a concessional USD/INR swap facility for ECBs and OFCBs, wherein banks can hedge the eligible foreign currency borrowings up to 31st Dec’26 with the RBI at a flat concessional cost of 1.5% p.a.

* The cost of hedging the OFCB exposure is generally around 3.5-4.0% for a bank. Hence, this gives the banks a benefit of 200-250bp on the incremental OFCB exposures.

Stability in USD/INR rate to help ease persistent FII selling

* FIIs have been on a constant selling spree (USD45b from CY24 till date), led by uncertain global macros, better investment opportunities in other Asian emerging countries and sharp depreciation in USD/INR, which is further dampening the overall investment returns. Large private banks have thus been impacted the most, with FII holdings in these banks declining by 3%-13% in recent years.

* The RBI’s measures on incentivizing higher overseas borrowing and FCNR(B) deposits, coupled with taxation benefits on capital gains in debt markets and opening up more debt instruments for FII investments, should drive improved FX inflows in the near term.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412