The Reserve Bank of India (RBI) has surprised the banking sector by announcing the early closure of a special dollar deposit window. This facility, which was for overseas residents, will now shut down on August 31. This move is significant because the scheme was a major source of cheap money for Indian banks, attracting more than $50 billion since it started in June.

Following this news, the cost of borrowing for banks has already started to jump. Rates on three-month Certificates of Deposit (CDs) rose by 16 basis points to reach 6.59 percent. A basis point is one-hundredth of a percentage point. This is the biggest one-day increase in borrowing costs that banks have seen in over a month. CDs are short-term debt papers that banks sell to investors to raise quick cash.

Banks were using these foreign dollar deposits to support their high loan growth. Because these deposits were stable and cheaper than domestic market rates, banks did not have to issue as many CDs. In late July, banks only sold about ₹57,120 crore in short-term debt, which was much lower than the ₹1 trillion they sold in early June. Now that the cheap dollar window is closing, banks will have to return to the expensive CD market.

Experts believe that money-market rates will rise by another 5 basis points before they become steady again. Anshul Chandak, the treasury head at RBL Bank, noted that he expects banks to start issuing more CDs soon to fill the funding gap. This will likely keep the pressure on bank profit margins as their cost of funds goes up.

There is a big reason why Indian banks are desperate for this funding. Loan growth in India is very high, growing at 19.3 percent as of late July. However, domestic deposits are only growing at 15.4 percent. Many Indian families are moving their savings away from bank fixed deposits and into other investments like the stock market. This creates a "funding gap" that banks must fill using professional market instruments.

The special window was first announced on June 5. The RBI helped banks by paying for the hedging costs (the cost of protecting against currency value changes). This allowed banks to offer very high interest rates to foreigners without losing money. The scheme was so successful that it met its goals early, leading to the RBI's decision to stop it now.

For bank officers, this means a tighter liquidity situation in the coming months. Branch managers may face more pressure to collect domestic deposits to avoid relying on expensive market borrowing. As the August 31 deadline passes, the industry will be watching how fast CD rates climb and if the RBI introduces any new measures to help banks manage their cash needs.