Indian banks face margin pressure from foreign currency deposits

Major Indian lenders, including ICICI Bank, HDFC Bank, and Axis Bank, are experiencing pressure on net interest margins (NIMs) following significant inflows from foreign currency non-resident (bank) [FCNR(B)] deposits. These three institutions raised a combined $40 billion through these accounts.

While the inflows have supported funding, they have also reduced NIMs and current account and savings account (CASA) ratios. CreditSights predicts that margins may recover by the fourth quarter of FY2027 as funds are deployed into higher-yielding assets and the impact of the Reserve Bank of India’s October rate hike is realized.

Economic factors such as inflation, higher interest rates, and a weak monsoon are expected to moderate loan growth in the second half of FY2027. Additionally, competition for low-cost household deposits remains a constraint on lending growth.