RBI’s liquidity constraints likely to squeeze bank margins, says Fitch
New Delhi: Margin pressures on Indian banks could intensify as the Reserve Bank of India’s (RBI) ability to inject rupee liquidity has narrowed amid efforts to curb currency volatility, Fitch Ratings said on Thursday.
The agency noted that while banks face limited direct foreign-currency risks, persistent funding cost pressures linked to Middle East tensions could weigh on profitability. Sector margins may fall 20–30 basis points below its 3.1 per cent forecast for FY27, potentially reducing operating profit relative to risk-weighted assets by 30–40 basis points from the projected 2.5 per cent.
Fitch’s base case had assumed deposit costs would ease in FY27, supported by accommodative liquidi-ty and transmission of the RBI’s 125 basis points of rate cuts since December 2024. However, only 44 basis points have been passed on to deposit rates as of January 2026, due to strong loan growth out-pacing deposit mobilisation and intensifying competition for funds.
To address liquidity conditions, the RBI had infused durable liquidity since the second half of FY25 through bond buybacks and open market operations, while signalling a proactive stance on maintain-ing adequate system liquidity.
However, surplus liquidity in the banking system has declined to around 0.5 per cent of deposits as of March 29, 2026, from 0.8 per cent in late February, amid sustained pressure on the rupee, which has depreciated by 4.5 per cent. Continued currency stress could constrain the RBI’s ability to ease liquidity further, as measures to support the rupee tend to absorb domestic liquidity.
Despite this, direct currency risks remain contained. Overseas loans account for less than 10 per cent of total sector lending, while net open foreign-currency exposure stood at about 2.5 per cent of equity as of 9MFY25.
The RBI’s directive for banks to unwind forex positions above $100 million underscores its focus on lim-iting volatility.
Fitch added that the overall impact on profitability should remain modest, with income from forex transactions estimated at under 0.1 per cent of risk-weighted assets.
