Indian banks have sharply curtailed the issuance of certificates of deposit (CDs), a key short-term funding instrument, after the Reserve Bank of India introduced measures to encourage lenders to mobilize foreign currency deposits. The central bank's decision to absorb hedging costs on eligible overseas dollar deposits has made foreign currency funding more attractive and cost-effective for banks.

According to market data, no certificates of deposit were issued during the three trading sessions through July 2. Banks raised approximately ₹708 billion through CDs between June 16 and June 29, a notable decline from nearly ₹1 trillion raised during the first half of June. Bankers expect issuance to remain muted through September as lenders increasingly rely on overseas foreign currency deposits for funding.

The RBI's temporary scheme, announced in June, is expected to attract more than $50 billion in foreign currency deposits by reducing hedging costs for banks. The initiative provides lenders with access to relatively cheaper and more stable funding compared with certificates of deposit, which have traditionally been used to bridge the gap between strong credit growth and slower deposit mobilization.

The shift has also eased borrowing costs in the money market. The yield on one-year certificates of deposit has fallen to around 6.84% from a peak of 7.96% in May, reflecting improved liquidity conditions. Several lenders are expected to refinance expensive short-term borrowings with lower-cost foreign currency deposits, potentially supporting their net interest margins in the coming quarters.