India’s banking sector is treading cautiously as the possibility of further RBI rate cuts in FY26 brings the risk of shrinking net interest margins (NIMs) into sharper focus. With monetary easing expected later this year, lenders are closely monitoring how this may affect their bottom line.
Banks’ net interest margins may come under pressure because loan rates typically get repriced faster than deposit rates. This mismatch, especially in an environment of falling repo rates, could reduce banks’ income from interest on loans while deposit costs take longer to adjust.
Highlighting this concern, ICICI Bank’s Executive Director Sandeep Batra shared during the post-earnings call, “In the near term, we will follow by and large what is happening in the banking system, and margins will be impacted by the repo rate cuts. We do expect more repo rate [cuts] to happen.”
Most loans in the Indian banking system are now linked to external benchmarks, which means any repo rate cut by the RBI is immediately passed on to borrowers, affecting lending rates and squeezing the spread that banks earn. On the other hand, deposit rates react with a lag, creating a temporary imbalance in income versus cost.
Interestingly, despite these concerns, banks like ICICI Bank, HDFC Bank, and YES Bank have shown slight margin improvements in Q4FY25. For example, ICICI Bank’s net interest margin rose to 4.41%, marginally higher than 4.40% a year ago. Similarly, YES Bank reported a NIM of 2.5%, up from 2.4% in the same period last year.
However, these gains could be short-lived if the RBI continues on its path of rate reduction, as is widely anticipated by market watchers and policymakers. The impact may be more visible in the upcoming quarters if funding costs don’t ease as quickly as lending rates.
As rate cuts loom large over FY26, banks are expected to take a cautious stance, optimizing their asset-liability strategies to maintain profitability. The coming months will be a true test of how well India’s lenders can navigate this evolving interest rate environment.
