Moody's sees India FY26 GDP growth over 6.5%; banking system outlook stable
This story was originally published at 15:40 IST on 12 March 2025
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--Moody's Ratings: Outlook for India's banking system stable
--Moody's: See India banks' operating environment remaining favourable
--Moody's: See India FY26 GDP growth exceeding 6.5%
--Moody's: India banks' asset quality to deteriorate moderately
--Moody's: See some stress in India banks' microfin, unsecured retail loans
--Moody's: India bks' profitability seen adequate; NIMs to fall marginally
MUMBAI – India's GDP growth in the financial year 2025-26 (Apr-Mar) is seen rising above 6.5% owing to the government's capital expenditure and tax cuts for middle income groups, which are seen to boost consumption, Moody's Ratings said in a report Wednesday. Easing monetary policy will also help economic growth, it said. Additionally, the outlook for the banking system was stable.
"We expect India's average inflation rate to decline to 4.5% in FY26 from 4.8% in the previous year," the ratings agency said. "We expect further rate cuts to be modest, as the central bank takes a cautious stance amid global uncertainty around US trade policies, as well as associated market and exchange rate volatility, as represented by a strengthening of the US dollar against emerging market currencies in late 2024 and early 2025."
The Union Budget for FY26 upped the tax rebate limit to INR 1.2 million from the earlier INR 700,000, essentially exempting individuals with incomes up to that amount from the tax net. As for capital expenditure, the Budget increased it by only 1% from the FY24 Budget amount to INR 11.21 trillion.
The RBI's Monetary Policy Committee lowered the policy repo rate to 6.25% in February, its first interest rate cut in nearly five years. Moody's Ratings sees India's FY25 GDP growth at 6.3%, against the government's second advance estimate of 6.5%.
The sound economic growth and bank fundamentals also augur well for the Indian banking system, Moody's said. Banks' net interest margins may fall moderately due to falling interest rates after substantial improvements in recent years, but profitability may be adequate.
The asset quality of Indian banks may deteriorate moderately due to stress in unsecured retail loans, microfinance loans, and small business loans, Moody's said. The ratio of non-performing loans across the banking system is seen at 2-3% in the next 12-18 months, it said. The systemwide gross non-performing asset ratio dropped to 2.6% as of the end of September from 7.3% at the end of March 2021 due to recoveries and write-offs of legacy problem loans while the fresh slippage ratio remained low, Moody's noted in the report.
However, unsecured retail loans make up just 10% of total loans, and banks have built sufficient loan-loss reserves against non-performing assets, which will prevent a large hit. Further, the quality of corporate loans is seen to remain healthy, due to businesses lowering their debt and growing their earnings, Moody's said.
"We expect slippage ratios and loan-loss provisioning costs to increase somewhat from cyclically very low levels," the ratings agency said. "This is because of the moderation of economic growth in recent quarters, the impact of past rises in interest rates, and the aging of unsecured retail loans, including microfinance loans, and some small business loans."
Non-interest incomes of banks is expected to be strong led by wealth and insurance services, and opportunistic gains in the bond market on the back of large business volumes, the ratings agency said. However, it expects banks' loan-loss provisioning to remain modest despite slight increases, it said.
"Overall, we expect the systemwide return on assets to be 1.25-1.4%, in FY26," as per the report. "The banking sector's profitability has improved substantially in the past few years mainly because of decreases in loan-loss provisions in line with improvements in asset quality." The systemwide return on assets increased to 1.4% during Apr-Sept of FY25 from 0.7% in FY21.
Banks will maintain strong capitalisation with internal capital generation likely to keep pace with asset growth and easy access to a deep domestic equity market, Moody's said. Banks' assets are seen to grow 11-13% with return on equity of 12-14%, which will generate stable capital for them.
Funding and liquidity of banks are seen stable, with loans growing in line with deposits during the year at a pace of 11-13%, the ratings agency said. The systemwide loan-to-deposit ratio is seen remaining around 80%. "The RBI is also likely to maintain adequate liquidity in the system through various tools, while banks' liquidity will remain sufficient thanks to existing statutory liquidity and cash reserve requirements," it said. End
Reported by Srijita Bose
Edited by Rajeev Pai
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