Fitch expect the Indian banking sector's average NIM to slightly contract by about 10bp in FY24 to 3.45%, following a 15bp increase in FY23 to 3.55%, under our base case, but remain well above that in prior years (FY17-FY22 average: 3.1%).

NIMs could face greater pressures if banks are forced to increase deposit rates further and turn to wholesale funding, for which costs are rising, says Fitch ratings.

Indian banks' net interest margin (NIM) will face pressure in the financial year ending March 2024 (FY24) as they increase deposit rates to attract funds to support sustained high loan growth, says Fitch Ratings.

Fitch expect the Indian banking sector's average NIM to slightly contract by about 10bp in FY24 to 3.45%, following a 15bp increase in FY23 to 3.55%, under our base case, but remain well above that in prior years (FY17-FY22 average: 3.1%).

This contraction is consistent with the lagged normalisation in deposit rates, although banks should be able to offset some of the impact as they gradually pass-through policy rate hikes to corporate loans, which are typically slower to reprice than retail and SME loans.

However, loan growth continuing to outstrip deposit growth - as seen in the past few months - is a potential risk to our assessment. NIMs could face greater pressures if banks are forced to increase deposit rates further and turn to wholesale funding, for which costs are rising. The risks could be potentially pronounced if higher interest rates are unable to meaningfully moderate credit demand and increase deposit inflows as we expect under our base case.