India liquidity support eases funding strain for banks

Margins will fall in the near-term, but pressures will ease as deposit costs fall.

India’s liquidity injections have eased the funding conditions of local banks and is expected to help support loan growth and reduce funding cost pressures, says Fitch Ratings.

This is reflected in increased system liquidity and falling deposit costs, which should enable transmission of 100 basis points in policy rate cuts in 2025, the ratings agency said in a commentary published on 15 July 2025.

Whilst banks’ margins will fall in the near term as a significant share of loans will be repriced downwards, margin pressures should ease as deposit costs also fall ‘meaningfully’ by the financial year ending in March 2027.

“We expect funding and liquidity conditions to be sensitive to changes in the central bank’s liquidity stance and shifts in retail savings,” Fitch said.

Lower interest rates will likely support asset quality, but significantly higher loan growth could raise risks, offset by potentially improved risk pricing, it added.

The liquidity injections mark a shift in the Reserve Bank of India’s (RBI) policy stance towards spurring loan growth.