Indian banks are continuing to borrow from the market even after a fresh wave of foreign currency non-resident deposit inflows, a sign that liquidity in the system remains unevenly spread rather than broadly abundant. The pattern points to a banking sector where aggregate inflows are not translating into uniform funding comfort, leaving some lenders dependent on expensive market sources while others are able to shed high-cost deposits.
Uneven Cash Distribution
The latest funding behaviour suggests that excess liquidity, where it exists, is concentrated in only part of the banking system. Several lenders have seen a sharp rise in certificates of deposit, a common instrument used to raise short-term money from the market, even as others have reduced reliance on costly deposits. That divergence indicates that the benefit of foreign currency non-resident, or FCNR, inflows has not been evenly transmitted across banks of different sizes, business models, and liability profiles.
FCNR deposits are typically viewed as a stable and relatively attractive source of foreign currency funding for banks, especially when domestic liquidity is tight. But the current trend shows that many lenders have been unable to fully capitalise on those inflows. Instead of easing funding pressure across the board, the deposits appear to have strengthened the balance sheets of only select institutions, while others continue to face a mismatch between loan demand and available low-cost funds.
The result is a market in which borrowing costs remain elevated for some banks even as headline liquidity indicators may appear comfortable. For lenders that cannot access sufficient deposit growth, certificates of deposit and other wholesale funding tools remain necessary to maintain credit expansion and day-to-day operations. That reliance, however, comes at a price: market borrowing is typically more expensive than core deposits, and sustained dependence can compress margins if lending yields do not rise at the same pace.
Funding Pressure Persists
The persistence of market borrowing also reflects the structural nature of liquidity distribution in India's banking system. Large banks with stronger retail franchises often attract deposits more easily and can afford to reduce expensive liabilities. Smaller or more deposit-sensitive lenders, by contrast, may need to compete aggressively for funds, especially when credit demand is firm and deposit mobilisation lags.
This split matters because it can influence both profitability and lending behaviour. Banks facing tighter funding conditions may become more selective in loan growth, raise lending rates, or lean more heavily on short-term instruments to bridge the gap. Those with stronger liquidity positions, meanwhile, may be able to price loans more competitively or improve net interest margins by lowering their cost of funds.
The current environment also highlights the limits of reading the banking system through aggregate liquidity alone. A broad inflow of FCNR deposits can mask significant differences between institutions. Some banks may receive a meaningful share of those funds and quickly reduce wholesale borrowing, while others see little direct benefit and remain exposed to market volatility. In effect, the system can look flush on paper while individual lenders continue to feel pressure.
For policymakers and market participants, the message is clear: liquidity support does not automatically solve distribution problems. The challenge is not only how much money enters the system, but where it lands and how efficiently it is transmitted through the banking network. Until that imbalance narrows, market borrowing is likely to remain a feature of the sector, even in periods of apparently comfortable system liquidity.
The broader implication is that funding costs may stay uneven across banks, with consequences for credit pricing, profitability and competitive positioning. In a sector where margins are closely watched, the inability to convert FCNR inflows into broad-based funding relief could keep pressure on lenders that are already paying up for deposits in a competitive market.