Key Points

The global credit rating agency noted that since January, the RBI has injected approximately Rs 5.6 trillion, around 2 per cent of total system assets, into the banking system through government securities purchases. This has led to a liquidity surplus since March and significantly softened funding conditions for banks.

Fitch believes that these steps have alleviated the intense competition for deposits that Indian banks had been grappling with over the past year.

Structural deposit pressures had previously built up as loan growth outpaced deposit mobilization, driving up the loan-to-deposit ratio and forcing banks to raise deposit rates to attract funds.

However, the RBI's liquidity easing, combined with a 100 basis point cut in the cash reserve ratio (CRR), is expected to release an additional Rs 2.7 trillion in liquidity in phases, has reversed that trend.

The availability of surplus liquidity has already started driving down the cost of fresh deposits. Although Fitch anticipates a 30 basis point contraction in net interest margins for FY26 due to the immediate downward repricing of nearly half of the outstanding loans, it expects margin pressures to ease in FY27 as deposit costs fall further and the benefits of lower CRR requirements take hold.

The report also points out that loan growth for FY25 is projected at 11 per cent, slightly above nominal GDP growth of 9.8 per cent, which may reflect rising risk appetite among banks.

Despite the relief from structural deposit pressure, Fitch cautions that this could reverse if the RBI tightens liquidity in response to inflation or currency volatility. Such a move could again elevate funding costs and compress margins.

In conclusion, Fitch asserts that the RBI's liquidity easing has played a central role in relieving structural deposit pressures in the Indian banking system.

While the current environment is conducive to lower funding costs and improved credit conditions, sustaining these benefits will depend on macroeconomic stability and continued supportive policy action.

- ANI