HDFC Bank profit rises, but margins stay tight

Why does the RBI need to get involved in FCNR(B) deposits?

An Indian bank takes dollars from an NRI (non-resident Indian) deposit but lends in rupees, so it must swap the dollars for rupees. That swap, a hedge against exchange-rate moves, costs about 3.5%. The RBI absorbs that full cost for fresh 3-5 year deposits until September 30, 2026, making the deposits cheap for banks and worth competing for.

Why do banks need the RBI to pay their hedging costs?

When a bank takes FCNR(B) dollars but lends in rupees, it needs to swap currencies to guard against exchange-rate swings. That hedge normally eats about 3.5% of the deposit's value. With the RBI covering it until September 30, 2026, banks can offer NRIs (non-resident Indians) rates close to domestic deposits without the cost. Nomura estimates $55 billion could flow in, mostly in August-September.

How does the RBI's FCNR(B) subsidy actually help HDFC Bank's margins?

The RBI bears the roughly 3.5% hedging cost on fresh 3-5 year FCNR(B) deposits until September 30, 2026, making these foreign-currency deposits cheap for banks. For HDFC Bank, which has a strong NRI franchise, this provides a low-cost funding source that can reduce its reliance on costlier borrowings, which stood at 11% of funding. As the CFO noted, cost of funds could improve by 40-50 basis points, but only gradually. Our read: the subsidy is a targeted relief valve, not an immediate margin fix, since benefits depend on how much HDFC Bank mobilizes and how quickly.

Why is the bank's borrowing share so hard to bring down?

HDFC Bank's borrowings stand at 11% of funding, well above the industry's 5-6%. The CFO says this will not settle quickly because maturing borrowings only reduce the share gradually, and as loans grow, new funding will naturally dilute the ratio. The bank is also watching non-retail deposit costs, which stay elevated while system liquidity swings between ₹5.5 trillion and negative ₹0.43 trillion. Our read: the 11% is a legacy of the HDFC merger, and it will take several quarters of loan growth to normalize.

What made the borrowings so high in the first place?

The 11% borrowing share traces to the July 2023 merger with HDFC Limited, which brought home-loan assets onto the bank's books faster than deposits could match them. The credit-deposit ratio jumped to 108% right after the merger, and borrowings filled the gap. Deposits have since grown 14.4% in FY26, pulling the ratio down to 95%, but the merged entity's funding profile still carries a heavier borrowing load than peers who did not absorb a large loan book. The CFO confirms maturities and loan growth will dilute it only gradually, which is why the bank is pushing FCNR(B) deposits as a cheaper substitute.

What would it take for the borrowings share to actually fall?

The CFO says maturing borrowings and overall loan growth will dilute the 11% share, but only gradually. Loan growth is the faster lever: as advances grow, new funding mostly comes from deposits, so the borrowing percentage "dwarfs and comes down." Maturing borrowings also help, but the industry benchmark of 5-6% is not a near-term target. Deposits have already grown 14.4% in FY26, which pulled the credit-deposit ratio from 108% to 95%. Our read: expect several more quarters before the ratio moves meaningfully below 10%.

Who loses if the RBI's FCNR(B) subsidy ends on schedule?

The subsidy is a temporary window: the RBI only covers the roughly 3.5% hedging cost on fresh 3-5 year deposits mobilised until September 30, 2026. After that, new FCNR(B) deposits would need to absorb the hedging cost again, making them costlier relative to domestic deposits. Banks with the strongest NRI franchises, including HDFC Bank, would lose the cheapest source of foreign funding they have today. The same applies to NRIs, who would see offered rates fall back toward US dollar rates rather than the near-domestic levels banks can now pay. The existing deposits keep the benefit until maturity, so the loss hits the next round of mobilisation. Our read: banks will front-load FCNR(B) campaigns before the deadline, then let the book run off.

How does the new CEO change the timing of margin recovery?

The new chairman was appointed to minimize uncertainties and signal stability, but the CEO transition is a separate process still in progress. The CFO says the cost of funds benefit is "very much in the works" and part of the annual and strategic reviews, which continue regardless of leadership. The margin recovery depends on systemic liquidity stabilizing and the borrowing mix falling from 11%, both of which the management describes as gradual. Our read: the leadership change is meant to remove a stock overhang, not to accelerate the margin timeline, which stays tied to those funding metrics.

Can the bank keep lending without the profit squeeze worsening?

HDFC Bank's net interest margin fell to 3.16% from 3.27% as asset yields softened. The chief financial officer says cost of funds could improve by 40-50 basis points, but not rapidly. Liquidity swings, system liquidity averaged ₹2.08 trillion but ranged from ₹5.5 trillion to negative ₹0.43 trillion, keep short-term rates volatile. Our read: margins stay tight until systemic liquidity stabilizes and borrowings drop from 11% of funding.

How much is the hedging cost?

The hedging cost is around 3.5%. When banks take FCNR(B) deposits in foreign currency but lend in rupees, they must swap currencies as insurance against exchange-rate moves, and that swap normally costs the bank. Under the scheme announced on June 5, 2026, the RBI absorbs this entire cost for fresh deposits of 3-5 year tenors until September 30, 2026, making the deposits cheaper for banks to raise.

Who actually pays when the bank's borrowing costs stay high?

The borrowing mix sits at 11% of funding, well above the industry's 5-6%, and the CFO says it will not settle lower quickly. Until it falls, the extra cost is borne by the bank's shareholders through thinner net interest margins, which dropped to 3.16%, and by borrowers, since the bank keeps short-term rates from easing. Our read: depositors are protected, so the squeeze lands on the bank's profits and its stock, which has already fallen 27% in a year.

Why is India's biggest bank borrowing more than its rivals?

The borrowing mix is 11% of funding versus 5-6% for the industry because the bank leans on borrowings it has not yet shed after the 2023 merger with HDFC Limited. The CFO says growth will dilute this ratio, since new loans can be funded through deposits rather than more borrowing, and maturing borrowings will also shrink it. But he adds it will not settle lower quickly, so the elevated cost keeps dragging on margins. Our read: the bank is funding growth with borrowed money while deposits catch up, and shareholders pay for that delay through the 27% stock fall.

Why is the bank still using borrowings instead of deposits to grow?

The 11% borrowing mix is stuck near where it was after the 2023 merger with HDFC Ltd, and the CFO says it will not settle toward the industry's 5-6% quickly. The shared logic is that growth itself will dilute the ratio: as new loans get funded through fresh deposits rather than more borrowing, the borrowing base stays flat while the overall funding pool expands. Even then, he cautions this is a slow, multi-quarter process, not something that resets in a single earnings cycle. Our read: the bank is deliberately tolerating the funding drag because chasing deposits aggressively would raise its cost of funds even more than the borrowings cost it today.

Why would chasing deposits aggressively cost even more than borrowings do now?

The CFO says deposit costs, especially for non-retail deposits, have stayed elevated across the industry, not just at HDFC Bank. Retail deposit costs have been kept steady by most banks. Raising more deposits quickly would mean paying up on that expensive non-retail bucket, which would push the cost of funds up. Borrowings at 11% of funding are stuck but the incremental drag is already priced in. Our read: the bank is choosing the known cost of borrowings over the unknown and likely higher cost of a deposit war.

Why would a deposit war hurt the bank more than it helps?

Retail deposit costs across the industry have been steady because no bank is competing aggressively there, while non-retail deposit costs have stayed elevated. If HDFC Bank tried to win more deposits quickly, it would have to pay up on that expensive non-retail bucket, which would push its cost of funds up. Borrowings at 11% of funding carry a known, already priced-in drag. Our read: the bank avoids a broad deposit price war because winning by outbidding rivals would wipe out the margin benefit faster than borrowings cost it today.

Would winning a deposit war actually end up hurting depositors too?

The CFO says retail deposit costs have stayed steady because banks are circumspect, while non-retail deposit costs have been elevated. If HDFC Bank chased deposits aggressively, it would pay up on that expensive non-retail bucket, raising its cost of funds. That cost would then pressure its net interest margin further, currently at 3.16%, and cap how much it can cut lending rates. Our read: a deposit war would squeeze the bank's profits and keep borrowing rates from falling, so depositors get no gain and borrowers pay the price.

What would make the bank's margins recover quickly?

The CFO points to three levers: stable system liquidity, a smaller borrowing mix, and a higher retail loan share. Liquidity averaged ₹2.08 trillion but swung from ₹5.5 trillion to negative, so short-term rates stay volatile. Borrowings at 11% of funding need to drift toward 8-9%, and retail loans need to climb from 52% toward 60%. Our read: none of these move in a quarter, so margin recovery is a multi-year story, not a near-term event.

What is the RBI trying to fix?

The RBI wants to stabilise short-term rupee rates and attract foreign capital by paying the hedging cost on FCNR(B) deposits, roughly 3.5%, for fresh 3-5 year deposits until September 30, 2026. With less pressure on rates, banks can offer NRIs (non-resident Indians) higher returns. Nomura expects inflows of $55 billion, mostly in August-September.

Why is the 11% borrowing mix a problem for margins?

Borrowings are HDFC Bank's costliest source of funds. When the bank borrows at 11% of its funding, it pays market rates on roughly one rupee in nine, instead of using cheaper deposits. The CFO says that is why the cost of funds can improve by 40-50 basis points, but not quickly. Industry borrowings run at 5-6%, so there is headroom, but the mix will only shrink as deposit growth outpaces the need to borrow, which takes time. Banks that borrowed at 11% of funding can cut costs only by replacing borrowings with cheaper deposits, and that shift comes gradually.

Why can't the bank just raise deposit rates to attract more deposits and cut borrowings faster?

Raising rates would lift the cost of deposits, which is the exact lever the bank is trying to push down. The CFO points to retail deposit costs being steady and circumspect, implying rates are already competitive without being pushed higher. The borrowing mix will only shrink as deposit growth outpaces the need to borrow, and that is a gradual process tied to liquidity stabilizing and system rates settling. Our read: the bank accepts a slower repair to margins rather than buying deposits at prices that would erode the benefit.

Why can't cheaper FCNR deposits help bring the borrowing mix down faster?

FCNR(B) deposits are foreign currency, not rupees, so they don't replace the borrowings that fund rupee lending. The bank would still need to swap those dollars into rupees, which brings back the hedging cost the RBI is temporarily absorbing. The window closes on September 30, 2026, and Sashidhar Jagdishan noted that even in 2014, FCNR(B) flows picked up only in the second month after announcement. The deposits help stabilise system liquidity and short-term rates, but the borrowing mix itself will only fall as rupee deposit growth outpaces loan growth. Our read: FCNR(B) inflows steady the rates that make rupee deposits competitive, so the mix repair still runs on the bank's own deposit engine.

If FCNR(B) deposits don't fix margins, why is the RBI's swap window still seen as good news for the bank's funding costs?

The swap window absorbs roughly 3.5% of hedging costs for fresh 3-5 year deposits, bringing FCNR(B) rates close to domestic deposit rates and easing pressure on short-term rates, which the CFO says is the biggest determinant of non-retail deposit costs. It does not replace rupee deposits, but it adds a cheaper funding avenue while the window is open. Our read: the bank's margin repair depends on liquidity settling, and the swap window buys time for that without forcing HDFC to raise deposit rates and worsen its cost of funds.

If the RBI is paying hedging costs, why don't banks just keep FCNR(B) deposits rolling over forever?

The window is strictly time-bound: the RBI bears hedging costs only for fresh 3-5 year deposits mobilised until September 30, 2026. After that date, banks would again absorb the roughly 3.5% hedge cost, making fresh FCNR(B) deposits as expensive as before. The 2013 precedent lasted only for a short window too. NRIs also earn less than domestic deposits, as the rates are benchmarked to US dollar rates, so banks won't rely on them beyond the subsidy period. Our read: FCNR(B) is a liquidity bridge, not a permanent funding solution.

So what is the bank doing to stop its market value from shrinking?

HDFC Bank's market cap has fallen 27% in a year, largely due to leadership uncertainty. The bank has acted on two fronts. First, it resolved the governance dispute: external law firms found the former chairman's resignation allegations unsubstantiated, and a new chairman, Rajiv Kumar, has been appointed. Second, Rajiv Kumar's arrival signals stability, addressing investor concerns that had kept the stock trading at a discount. Our read: the margin and funding issues are secondary to investors right now; the leadership fix is the primary lever to restore confidence and valuation.

What would make the margin recover sooner?

The CFO lists three levers: stable system liquidity so short-term rates stop swinging, borrowings falling from 11% of funding toward the industry's 5-6%, and the retail mix of loans rising from 52% toward 60%. Liquidity is the most immediate trigger; the RBI's FCNR(B) swap window is aimed at stabilising rates. The other two depend on deposit growth and loan mix, which the bank says are journeys, not quarter-to-quarter events. Our read: margins recover only when liquidity settles, and that is visible by the end of the current fiscal year.