RBI's Liquidity Boost Eases Pressure on Indian Banks

Indian banks are witnessing a significant alleviation in structural deposit pressures, largely due to the aggressive liquidity support measures implemented by the Reserve Bank of India (RBI) in 2025, as per Fitch Ratings. The global credit rating agency indicated that since January, the RBI has infused approximately Rs 5.6 trillion, or about 2% of total system assets, into the banking system through the purchase of government securities. This strategic move has resulted in a liquidity surplus since March, significantly easing the funding conditions for banks.

According to Fitch, these measures have mitigated the fierce competition for deposits that Indian banks have faced over the past year. Structural deposit pressures had previously accrued as loan growth outstripped deposit mobilization, which caused an increase in the loan-to-deposit ratio and compelled banks to elevate deposit rates to attract funds.

However, the RBI's liquidity easing, along with a 100 basis point reduction in the cash reserve ratio (CRR), is anticipated to unleash an additional Rs 2.7 trillion in liquidity in phases, thus reversing the previous trend. The surplus liquidity availability has begun to lower the cost of fresh deposits. Although Fitch foresees a 30 basis point contraction in net interest margins for FY26 due to the immediate repricing of nearly half the outstanding loans, it expects this margin pressure to decrease in FY27 as deposit costs decline further and the benefits of lower CRR requirements are realized.

The report further highlights that loan growth for FY25 is projected at 11%, slightly surpassing nominal GDP growth of 9.8%, which may signal increased risk appetite among banks. Despite the reprieve from structural deposit pressure, Fitch warns that this could be reversed if the RBI tightens liquidity in response to inflation or currency volatility. Such a scenario could once again drive up funding costs and compress margins.

In conclusion, Fitch maintains that the RBI's liquidity easing has been pivotal in relieving structural deposit pressures within the Indian banking system. While the current environment favors reduced funding costs and improved credit conditions, the sustainability of these benefits hinges on macroeconomic stability and ongoing supportive policy initiatives.

(With inputs from agencies.)