New Delhi, April 2 The pressure on Indian banks could increase, as the Reserve Bank of India's (RBI) ability to inject local-currency liquidity into the banking system has narrowed amid efforts to contain rupee volatility, a report said on Thursday.
However, banks' direct foreign-currency risks remain limited, Fitch Ratings said in a report.
"Sector margins could decline by 20-30 bps below our current 3.1 per cent forecast for the financial year ending March 31, 2027 (FY27) if higher funding costs linked to Middle East tensions persist. This could reduce operating profit/risk-weighted assets (RWAs) – our core earnings metric – by around 30-40bps, from our 2.5 per cent forecast for FY27," it said.
The base case assumed that deposit costs would decline in FY27 as accommodative liquidity would enable further transmission of the RBI's 125 bps of policy rate cuts since December 2024; only 44 bps have been passed through to deposit rates as of January 2026, due to intensified competition for deposits with loan growth exceeding deposit growth, it said.
In response, it said, the RBI increased the supply of durable liquidity to the banking system since 2HFY25 through government bond buybacks and open-market purchases.
It also indicated that it would remain proactive in maintaining adequate system liquidity.
However, it said, the banking-system liquidity surplus has declined to about 0.5 per cent of deposits as of March 29 2026 – from 0.8 per cent in late February before the onset of the Middle East conflict – amid sustained currency pressures, with the rupee having depreciated by 4.5 per cent.
If sustained, currency pressures could limit the RBI's ability to ease banking system liquidity, as measures to support the rupee also drain local-currency liquidity from the banking system, it said.
Rupee volatility is unlikely to have a material direct effect on Indian banks, as the system is denominated predominantly in local currency: overseas loans were under 10 per cent of sector loans, and the net open foreign-currency position was not significant at 2.5 per cent of equity at 9MFY25, it said.
RBI's recent directive for banks to unwind forex positions above USD 100 million also highlights its focus on limiting currency volatility.
However, it said, "the impact on banks' profit should be limited, as we estimate income from exchange transactions at less than about 0.1 per cent of risk weighted assets.
