Middle East conflict weigh on Indian banks’ margins and profits

Sector margins could decline to below FY2027 forecasts.

Indian banks could see pressure margins ramp up as a result of the Middle East conflict.

Sector margins could decline by 20 basis points (bp) to 30 bp below the 3.1% FY2027 forecast earlier set by Fitch Ratings, it said in a new commentary published in April 2026. This would depend on whether funding costs trend higher as a result of Middle East tensions persisting, the ratings agency said.

“This could reduce operating profit/risk-weighted assets (RWAs)–our core earnings metric–by around 30bp to 40bp, from our 2.5% forecast for FY2027,” Fitch Ratings said.

Treasury gains could also be moderately below previous expectations, but Fitch said that its rated banks should have sufficient earnings buffers to absorb this without affecting earnings and profitability assessments.

Rupee volatility is unlikely to have a material direct effect on Indian banks, as the system is denominated predominantly in local currency. Less than 10% of sector loans are overseas loans.

The rupee has depreciated by 4.5% from February to March.

“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,” Fitch said.

Banking system liquidity surplus has declined to 0.5% of deposits, however, as of 29 March. In late February, before the onset of the Middle East conflict, it was at 0.8%, Fitch said.