Indian bank margins face mounting pressure as the RBI's ability to inject rupee liquidity tightens amid currency volatility concerns. Fitch Ratings warns sector margins could decline 20-30 basis points below its 3.1 percent FY27 forecast if elevated funding costs from Middle East tensions persist. This would reduce operating profit on risk-weighted assets by approximately 30-40 basis points from the previously expected 2.5 percent. The banking system's liquidity surplus has contracted to just 0.5 percent of deposits as of late March from 0.8 percent in February, reflecting sustained rupee depreciation of 4.5 percent. While deposit costs were expected to fall as the RBI transmitted its rate cuts, only 44 basis points of the 125 basis point reduction since December 2024 has reached depositors due to intense competition.
