Axis Bank MD & CEO Amitabh Chaudhry has issued a warning about potential 'abnormal lending' by banks due to the unexpected surge in FCNR(B) deposits, while also forecasting a likely interest rate hike in India's near future.
Key Points
- Axis Bank MD & CEO Amitabh Chaudhry warned that the influx of FCNR(B) deposits could lead to 'abnormal lending' by banks seeking to deploy excess liquidity.
- Inflows through the RBI's concessional swap facility for FCNR(B) deposits reached $136.4 billion by August 31, exceeding market estimates.
- Chaudhry suggested that India might face an interest rate hike in October or December due to the narrow gap between US and Indian rates and geopolitical turmoil.
- He also advocated for consolidation to create bigger banks in India and clarified that AI is not the primary cause of recent moderation in banking workforce numbers.
- HDFC Bank and Axis Bank both saw a reduction in employee count in FY26, attributed to technology investments rather than AI.
The surge in funds into the banking system through the Reserve Bank of India's (RBI's) concessional swap window for foreign currency non-resident (bank), or FCNR(B), deposits could lead to "abnormal lending" as banks seek to deploy excess liquidity, cautioned Amitabh Chaudhry, MD & CEO of Axis Bank, India's third-largest private-sector lender.
"FCNR could lead to some abnormal lending, because we will have to deploy this. I hope they don't do that," Chaudhry said at the Global Fintech Fest 2026, urging bankers to be cautious in deploying funds raised through FCNR(B) deposits.
FCNR(B) Inflows Exceed Expectations
Inflows under the special window have been higher than anticipated by the industry and various estimates, raising concerns over how banks will deploy the additional liquidity.
Inflows through the RBI's concessional swap facility reached $136.4 billion by August 31, with banks mobilising $127.2 billion in FCNR(B) deposits — well above late market estimates of $90-100 billion.
The FCNR(B) window closed on August 31.
The RBI had operationalised the concessional swap facility for fresh FCNR(B) deposits, overseas foreign currency bonds (OFCBs) and external commercial borrowings (ECBs) on June 8.
The initial deadline for the FCNR(B) window was September 30, 2026, but the central bank brought it forward by a month following the strong response.
The larger-than-anticipated FCNR(B) inflows have pushed system liquidity to nearly Rs 10.5 trillion on Wednesday.
According to industry experts, banks have three broad avenues for deploying the funds — investing in five-year government bonds, replacing high-cost deposits or lending to corporates. But with credit growth already strong, particularly in the corporate segment, there are concerns over how much more banks can lend.
Interest Rate Hike Anticipated
Chaudhry also cautioned that the narrow gap between interest rates in the US and India could pose a challenge. Geopolitical turmoil in the Gulf could put further pressure on the domestic currency, he said, adding that there may be a need for higher interest rates.
"I think we are staring at some rate hike in the near future.
"What time it will be, I don't know.
"But if you read what the economists are saying, they're saying it will likely be in October or December.
"If not October, it should be in December," Chaudhry said.
Call for Bigger Banks and AI's Impact
Meanwhile, Chaudhry said India needs bigger banks, and consolidation could be one way of achieving this.
"I do believe that India needs bigger banks. And one way to get there is for some of the banks to come together.
"So if the right one comes along with the right fit, I think some of that consolidation will happen," he said.
On the impact of artificial intelligence (AI) on the banking workforce, Chaudhry said the moderation in employee numbers at most banks was not a result of AI, but reflected investments in technology made over the past few years.
Given high attrition rates in Indian banks, he said, there should not be a significant impact on employee growth.
"As far as people are concerned, the numbers that you see right now are more reflective of the technology investments that have been made in the last four or five years.
"It is not necessarily reflecting that AI is leading to this," he said.
Workforce Reductions in Banking Sector
HDFC Bank, India's largest private-sector lender, cut its employee count by 3,343, or 1.56 per cent, to 211,000 in 2025-26 (FY26).
Axis Bank also reduced its workforce by around 3,100 in FY26 as investments in technology over the years began yielding productivity gains.
