Bank stocks that could deliver up to 48% return after RBI's FX boost - HDFC Bank, ICICI Bank or SBI?

Bank Stocks to BUY: Brokerage firm Motilal Oswal Financial Services believes the Reserve Bank of India's recent measures on FCNR(B) deposits and external commercial borrowings (ECBs) could attract foreign exchange inflows of USD 40-50 billion in FY27, improve banking system liquidity and support the rupee.

According to the brokerage, the RBI's twin forex-related initiatives aim to encourage foreign capital inflows, strengthen forex reserves, and stabilise the USD-INR exchange rate. It expects the measures to provide temporary relief in deposit mobilisation and improve systemic liquidity in the near term.

Motilal Oswal noted that banks will benefit from a special FCNR(B) deposit window running from June 8 to September 30, 2026. Under the scheme, banks can raise FCNR(B) deposits for three to five years and swap the funds into rupees, with the RBI bearing the entire hedging cost.

The brokerage said these deposits will also be exempt from CRR and SLR requirements, making them attractive for banks. As a result, several banks have already increased FCNR(B) deposit rates to 6-7 per cent.

RBI Measures Could Lower Borrowing Costs

The brokerage said the RBI has also introduced a concessional USD-INR swap facility for ECBs and overseas foreign currency borrowings.

"The borrowing cost for banks via the ECB route will likely fall by 200-250 basis points, which will enable the system to raise resources while keeping funding costs under control," Motilal Oswal said.

It added that banks generally incur hedging costs of 3.5-4 per cent on overseas borrowings. The RBI's concessional facility significantly reduces this cost, making foreign-currency borrowing more attractive.

Lessons From 2013

Motilal Oswal compared the latest move with a similar RBI initiative introduced in 2013 during the taper tantrum period. The brokerage said the earlier FCNR(B) swap window resulted in FCNR(B) deposit inflows of about USD 27 billion and total NRI deposit inflows of USD 34 billion in FY14. The move helped improve India's forex reserves and supported the rupee.

Based on historical experience and current market conditions, Motilal Oswal expects foreign exchange inflows of USD 40-50 billion during FY27. The brokerage also expects the rupee to strengthen in the near term, with the USD-INR rate potentially moving to the 93-94 range.

Large Banks Best Positioned

Motilal Oswal believes banks with a strong customer franchise and overseas presence are likely to attract a larger share of FCNR(B) deposits.

The brokerage said a significant portion of fresh FCNR(B) deposits could be backed by leveraged deposits, making customer reach and international presence important competitive advantages.

It also highlighted that customers could potentially earn returns of 15-26 per cent through leveraged FCNR(B) structures, while banks may earn around 65 basis points of additional spreads by deploying these funds into loans.

Top Banking Picks

Motilal Oswal's preferred banking stocks are HDFC Bank, ICICI Bank, SBI and AU Small Finance Bank.

Among private banks, the brokerage sees the highest upside in HDFC Bank and DCB Bank.

Private Banks

PSU Banks

Outlook

Motilal Oswal said the RBI's measures should help ease liquidity pressures, improve deposit growth and strengthen forex reserves. The brokerage also expects a more stable currency environment to reduce pressure from foreign institutional investors selling.

"Strong business growth, robust asset quality and a stable currency outlook will help ease FII selling pressure and boost sector performance," the brokerage said.

It remains positive on large private banks and SBI, citing their strong franchises, deposit mobilisation capabilities and ability to benefit from the expected surge in foreign currency inflows.