India’s banking sector could face mounting margin pressure due to the ongoing Middle East conflict, according to Fitch Ratings.
The agency said sector margins may decline by 20 to 30 basis points below its earlier FY2027 forecast of 3.1%, depending on whether funding costs rise as geopolitical tensions persist.
Such pressure could lower operating profit relative to risk-weighted assets—Fitch’s key earnings metric—by about 30 to 40 basis points from its projected 2.5% level for FY2027.
Treasury gains may also fall slightly short of previous expectations. However, Fitch noted that rated banks are likely to have sufficient earnings buffers to absorb the impact without materially affecting overall profitability.
Exchange rate volatility is expected to have limited direct impact, as the banking system is largely denominated in local currency, with overseas loans accounting for less than 10% of total lending. The rupee weakened by around 4.5% between February and March.
Fitch added that sustained currency pressure could constrain the Reserve Bank of India’s ability to ease liquidity, as efforts to support the currency may drain rupee liquidity from the system.
Liquidity conditions have already tightened, with the banking system surplus falling to 0.5% of deposits as of 29 March, down from 0.8% in late February before the escalation in Middle East tensions.
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