Indian banks' margins on lending operations are expected to moderate in the coming quarters after the central bank embarks on a monetary easing cycle.
The net interest margins (NIMs) of six major Indian banks are projected to decline by an average of 18 basis points in the fiscal year ending March, and by another 9 basis points in fiscal 2026, according to estimates by Visible Alpha, a part of S&P Global Market Intelligence.
"Consecutive and swift rate cuts [by the Reserve Bank of India (RBI)], instead of the earlier expected shallow rate cycle, could accelerate pressure on margins for banks with a higher share of floating rate loans, as downward re-pricing of deposits could happen with a lag," said Anand Dama, senior research analyst at Emkay Global, in a note dated April 10. He expects further rate cuts in the range of 25-50 basis points during the year.
Margin pressure
The RBI, under Governor Sanjay Malhotra, resumed rate cuts after five years, starting with a 25-basis-point reduction in February. A second 25 bps cut was announced April 9 as inflation fell below the central bank's target range. The monetary policy stance was also revised to "accommodative" from the earlier "neutral." Per the governor's statement, this stance reflects "easy monetary policy that is geared towards stimulating the economy through softer interest rates."
Lower lending rates reduce banks' interest income from external benchmark-linked loans, and deposit rates tend to adjust more slowly. This lag compresses the banks' NIMs in the short term. NIM is a key profitability metric that reflects the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings.
State Bank of India, the country's biggest lender by assets, is expected to post a NIM decline of 15 bps in the fiscal year that ended on March 31, 2025 and another 9 bps in fiscal 2026, according to Visible Alpha estimates.
The pressure on margins is also driven by deposit pricing competition. Investors continue to prefer higher-yielding term deposits over low-cost current and savings accounts, while competition from alternative investment options has increased.
"The challenges are likely to persist in the near term, which is likely to delay the transmission of rate cuts by the RBI to banks' cost of funds, in spite of the recent liquidity measures, thereby impacting the banks' margins," investor advisory firm ICRA said in a statement April 8.
The central bank has sought to shore up banking system liquidity to help the lenders. The RBI eased the cash reserve ratio (CRR) by 50 bps in December 2024. The CRR is the portion of total deposits that banks must hold as reserves with the central bank. This was followed by a string of liquidity infusions this year.
"The pro-growth regulatory stance [of the RBI] has revived the lenders' appetite for credit growth in [the fourth quarter of fiscal 2025] after a brief period of slow incremental credit growth in the initial period of the fiscal year 2025," ICRA said.
Tariff clouds
The profitability outlook for the banks is mixed. Private-sector banks are expected to maintain stable earnings, while state-owned banks are projected to experience a decline in net profits in the fiscal year ending March 2026, despite robust growth in the current year.
The three major government-owned banks — State Bank of India, Bank of Baroda Ltd. and Punjab National Bank — are expected to report a decline in net profits in fiscal 2026, according to Visible Alpha. Public sector banks in India generally have greater exposure to sectors more vulnerable to economic slowdowns, such as agriculture and industry. Private-sector banks, in contrast, typically maintain a more diversified loan portfolio.
Indian lenders are also expected to bear the effects of an impending 26% tariff on goods exported to the US, though India remains relatively insulated.
"India is the least exposed to the US tariff shock, and could benefit from the ongoing global supply-chain shifts," Nomura said in an April 8 note. "It is more domestic demand-oriented, benefits from lower oil prices and the supply-chain reshuffle. India's reciprocal tariff rate is lower than some of its competitors (China and Southeast Asia), and it is a strategic ally to the US," Nomura said.
