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Informist, Thursday, Apr. 2, 2026

 

--Fitch: Indian banks' tighter liquidity may add to margin pressure 

--Fitch: Indian banks unlikely to see material impact from rupee volatility 

--Fitch: RBI's recent FX norms to have limited impact on Indian banks' profit

 

MUMBAI – The pressure on margins of Indian banks could increase as the Reserve Bank of India's ability to inject liquidity into the banking system has become constrained amid efforts to contain rupee volatility, Fitch Ratings said Wednesday. The net interest margins of banks are expected to fall by 20-30 basis points below the agency's forecast of 3.1% for 2026-27 (Apr-Mar) if higher funding costs linked to West Asia tensions persist, the agency said.

 

"This could reduce operating profit/risk-weighted assets - our core earnings metric - by around 30bp-40bp, from our 2.5% forecast for FY27. Treasury gains could also be moderately below our previous expectations, but we believe Fitch-rated banks have sufficient earnings buffers to absorb such pressure without affecting our assessment of their earnings and profitability," the agency said.

 

While the agency expected that deposit costs would decline in FY27 as accommodative liquidity would enable further transmission of the RBI's 125 basis points of policy rate cuts since December 2024, only 44 bps has been passed through to deposit rates as of January. This is due to intensified competition for deposits with loan growth exceeding deposit growth.

 

Even though the RBI increased the supply of durable liquidity into the banking system during Oct-Mar through government bond buybacks and open-market purchases, the banking-system liquidity surplus has declined to about 0.5% of deposits as of Mar. 29 from 0.8% in late February before the onset of the military conflict in West Asia. The conflict also led to sustained currency pressures, with the rupee having depreciated by 4.5%, the agency said. "If sustained, currency pressures could limit the RBI's ability to ease banking system liquidity, as measures to support the rupee also drain local-currency liquidity from the banking system."
 

However, the agency said the rupee volatility is unlikely to have a direct impact on Indian banks, as the system is denominated predominantly in local currency. "We do not expect currency weakness alone to affect asset quality significantly, as corporate borrowers typically hedge foreign-currency borrowings. Still, sustained currency weakness coupled with higher energy and raw material costs could raise inflation and weaken SME repayment capacity."

Friday, the RBI directed banks to restrict the net open rupee positions in the onshore deliverable foreign exchange market to $100 ‌million at the end of each business day, effective Apr. 10. This move by the RBI highlights its focus on limiting currency volatility. "However, the impact on banks' profit should be limited, as we estimate income from exchange transactions at less than about 0.1% of RWAs (risk-weighted assets)."  End

 

US$1 = INR 93.16

 

Reported by J. Navya Sruthi

Edited by Deepshikha Bhardwaj

 

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