Mumbai: A surge in foreign-currency deposits is giving Indian banks ample liquidity to sustain strong credit growth but the surplus is set to squeeze net interest margins (NIMs) this quarter, particularly at private lenders, analysts said.
Motilal Oswal Financial Services expects private-bank NIMs to decline by 8-20 basis points in the September quarter, while Nomura Global Markets Research expects margins to remain under pressure as banks carry surplus FCNR(B)-linked liquidity in lower-yielding assets. The pressure arises because banks have mobilised the funds faster than they can deploy them into loans at normal lending spreads, temporarily diluting margins.
The trade-off highlights how the Reserve Bank of India’s push to attract dollar inflows has eased funding constraints for banks, even as it creates a near-term drag on profitability.
Strong credit demand means lenders can keep expanding loan books with the extra liquidity, but until those funds are deployed into higher-yielding assets, the surplus will likely weigh on margins.
