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RBI Flags Margin Pressure as Indian Banks Face Rising Costs and FCNR Flows
The Reserve Bank of India (RBI) has warned that the banking sector’s net interest margin (NIM) is under strain, noting a decline in the system‑wide NIM to 3.21 % in June 2026 from 3.26 % a year earlier. The central bank’s June 30, 2026 financial‑stability report shows that this drop is part of a broader trend of margin compression across the industry.
Several forces are driving the squeeze. Deposit costs remain high while credit growth continues to outpace deposit mobilisation. The RBI’s foreign‑currency non‑resident (FCNR(B)) deposit scheme has attracted large inflows, but the lower overseas interest rates and the leverage offered on these deposits are diluting margins. At the same time, banks are shifting toward lower‑yielding corporate loans at the expense of higher‑yielding retail loans.
Axis Bank’s chief financial officer, Puneet Sharma, said in the bank’s Q1 earnings call on July 18 that the current NIM decline is a “cycle bottom” and that the bank expects a gradual recovery. Axis Bank’s own NIM fell to 3.46 % in the quarter from 3.62 % in the previous quarter and 3.80 % a year earlier.
Other lenders echoed the concern. Bank of Baroda and IndusInd Bank noted that the gap between credit growth and deposit growth is likely to widen, tightening deposit mobilisation and, in turn, margins. They also highlighted a rise in lower‑yielding corporate loans as a drag on profitability.
CareEdge Ratings, in a note dated August 4, observed that operating‑expense growth for banks was contained at 3.9 % in Q1 FY27 but that the restraint is expected to be temporary. The rating agency said banks will continue to invest in branch expansion, specialist hiring and technology spending throughout the year. It added that pre‑provisioning operation profit (PPOP) growth is likely to slow and that future margin improvement will depend on whether lower funding costs benefit larger private banks.
ICICI Bank, which reported a sequential and year‑on‑year rise in margins, said it expects margins to remain range‑bound for the rest of FY27. Executive director Sandeep Batra attributed the quarterly improvement to income‑tax refunds and repricing of some bulk term deposits. He noted that the NIM trajectory will be influenced by geopolitical developments, monetary policy, liquidity, loan growth and local pricing, and that the FCNR(B) deposit programme will have a slightly dilutive effect.
State Bank of India (SBI) maintained its FY27 NIM guidance of 3 % after posting 2.86 % in the June quarter. Chairman C.S. Setty said it was too early to assess the impact of FCNR flows, but that any benefit from repricing high‑cost bulk deposits could be offset by margin dilution due to leverage.
The largest private lenders, HDFC Bank and ICICI Bank, have raised FCNR deposit rates to 6.25 % in response to competition. Managing director Suresh Ganapathy of Macquarie Capital noted that FCNR money is not cheap and that Q2 will face greater pressure. HDFC Bank’s CFO Srinivasan Vaidyanathan said the margin trajectory will depend on how interest rates move and how quickly assets are repriced relative to deposits.
The RBI’s Monetary Policy Committee (MPC) kept the key policy repo rate unchanged at 5.25 % in its last meeting. Governor Sanjay Malhotra said it was too early to discuss a rate hike. Macquarie Research, in a post‑policy note, said it does not foresee a rate hike in CY26, a stance that is negative for banks’ margin outlook.
In sum, Indian banks are navigating a complex mix of high deposit costs, aggressive credit growth, and FCNR inflows that are compressing margins. While some lenders are optimistic about a cycle bottom, most are cautious about providing guidance on future NIM trajectories, citing uncertainty in macroeconomic conditions and operating‑expense pressures.
The next earnings cycle will provide further insight into how banks manage these headwinds. Investors and analysts will be watching for any changes in FCNR rates, deposit‑cost dynamics, and the RBI’s policy stance as the fiscal year progresses.
Several forces are driving the squeeze. Deposit costs remain high while credit growth continues to outpace deposit mobilisation. The RBI’s foreign‑currency non‑resident (FCNR(B)) deposit scheme has attracted large inflows, but the lower overseas interest rates and the leverage offered on these deposits are diluting margins. At the same time, banks are shifting toward lower‑yielding corporate loans at the expense of higher‑yielding retail loans.
Axis Bank’s chief financial officer, Puneet Sharma, said in the bank’s Q1 earnings call on July 18 that the current NIM decline is a “cycle bottom” and that the bank expects a gradual recovery. Axis Bank’s own NIM fell to 3.46 % in the quarter from 3.62 % in the previous quarter and 3.80 % a year earlier.
Other lenders echoed the concern. Bank of Baroda and IndusInd Bank noted that the gap between credit growth and deposit growth is likely to widen, tightening deposit mobilisation and, in turn, margins. They also highlighted a rise in lower‑yielding corporate loans as a drag on profitability.
CareEdge Ratings, in a note dated August 4, observed that operating‑expense growth for banks was contained at 3.9 % in Q1 FY27 but that the restraint is expected to be temporary. The rating agency said banks will continue to invest in branch expansion, specialist hiring and technology spending throughout the year. It added that pre‑provisioning operation profit (PPOP) growth is likely to slow and that future margin improvement will depend on whether lower funding costs benefit larger private banks.
ICICI Bank, which reported a sequential and year‑on‑year rise in margins, said it expects margins to remain range‑bound for the rest of FY27. Executive director Sandeep Batra attributed the quarterly improvement to income‑tax refunds and repricing of some bulk term deposits. He noted that the NIM trajectory will be influenced by geopolitical developments, monetary policy, liquidity, loan growth and local pricing, and that the FCNR(B) deposit programme will have a slightly dilutive effect.
State Bank of India (SBI) maintained its FY27 NIM guidance of 3 % after posting 2.86 % in the June quarter. Chairman C.S. Setty said it was too early to assess the impact of FCNR flows, but that any benefit from repricing high‑cost bulk deposits could be offset by margin dilution due to leverage.
The largest private lenders, HDFC Bank and ICICI Bank, have raised FCNR deposit rates to 6.25 % in response to competition. Managing director Suresh Ganapathy of Macquarie Capital noted that FCNR money is not cheap and that Q2 will face greater pressure. HDFC Bank’s CFO Srinivasan Vaidyanathan said the margin trajectory will depend on how interest rates move and how quickly assets are repriced relative to deposits.
The RBI’s Monetary Policy Committee (MPC) kept the key policy repo rate unchanged at 5.25 % in its last meeting. Governor Sanjay Malhotra said it was too early to discuss a rate hike. Macquarie Research, in a post‑policy note, said it does not foresee a rate hike in CY26, a stance that is negative for banks’ margin outlook.
In sum, Indian banks are navigating a complex mix of high deposit costs, aggressive credit growth, and FCNR inflows that are compressing margins. While some lenders are optimistic about a cycle bottom, most are cautious about providing guidance on future NIM trajectories, citing uncertainty in macroeconomic conditions and operating‑expense pressures.
The next earnings cycle will provide further insight into how banks manage these headwinds. Investors and analysts will be watching for any changes in FCNR rates, deposit‑cost dynamics, and the RBI’s policy stance as the fiscal year progresses.
