RBI's Liquidity Support Brings Relief to Indian Banks

Indian banks are experiencing significant relief from structural deposit pressures, thanks to the Reserve Bank of India's (RBI) aggressive liquidity support measures introduced this year, as highlighted in a recent report by Fitch Ratings.

Impact of RBI's Measures

Since January, the RBI has injected approximately Rs 5.6 trillion into the financial system through government securities purchases, creating a liquidity surplus since March. This has significantly softened funding conditions across the banking sector.

Easing the Battle for Deposits

The liquidity support, alongside a 100 basis point reduction in the cash reserve ratio (CRR), has begun to alleviate the intense competition for deposits among banks. This competition had previously led to increased loan-to-deposit ratios and higher rates to attract savers.

Future Outlook

Fitch anticipates a 30 basis point shrinkage in banks’ net interest margins in FY26 due to downward repricing of outstanding loans. However, margin pressures are expected to ease in FY27 as deposit costs decrease and the benefits of the CRR cut become more apparent.

Warning: The relief may be temporary if the RBI needs to withdraw liquidity to combat inflation or stabilize the rupee, potentially increasing funding costs and squeezing margins once again.