Whalesbook
Banks are increasingly using a cautious approach to repricing existing term deposits to safeguard their profit margins. Even after the Reserve Bank of India (RBI) cumulatively cut the repo rate by 125 basis points between January 2025 and January 2026, outstanding deposit rates have softened by a mere 42 basis points. This contrasts sharply with fresh deposit rates, which have adjusted by nearly 99 basis points, showing about 79% of the rate cut passed on to new funds. This tactic helps maintain profitability as loan demand outpaces deposit growth. As of February 2026, credit growth stood at 14.9% year-on-year, while deposit growth lagged at approximately 12.5%. This dynamic has pushed the credit-to-deposit ratio above 80%. Investor valuations suggest they expect stable earnings, with State Bank of India (SBI) trading at a P/E of around 11.20, ICICI Bank at 15.5, HDFC Bank at 15.21, and Axis Bank at 14.20 as of March 2026.
This strategic deposit retention comes as the banking system faces tightening liquidity. India's banking system faced a deficit of approximately ₹65,900 crore in March 2026, a reversal from a comfortable surplus earlier in the year, driven by substantial tax outflows and RBI's currency interventions. This scarcity intensifies competition for deposits, encouraging banks to keep funding costs higher. Analysts at Nomura warn that credit growth driven by this liquidity crunch could pressure margins, forecasting a potential decline in profit margins in FY27 if deposit growth remains weak. SBI held about 22% of the deposit market share and 20% of advances as of Q3 FY26. SBI is valued at ₹9.51 lakh crore with a P/E of 11.7, while HDFC Bank is valued at roughly ₹11.77 lakh crore with a P/E of 15.21.
While banks are good at managing margins, risks are rising. Delaying deposit rate cuts helps short-term profits but could become a problem if deposit growth cannot meet credit demand. Private banks might face more pressure because their loans often adjust faster to external rates than their deposits do. This difference means private banks could see more significant profit margin pressure if they struggle to attract or retain deposits affordably. The rising credit-deposit ratio, exceeding 100% on an incremental basis by some estimates, forces banks to rely more on market borrowing, potentially increasing their cost of funds. RBI liquidity operations also influence deposit competition and funding costs.
Analysts predict that profit margins across the banking sector may not see a significant improvement until late FY26 or early FY27. Banks are working to defend margins by shifting loan portfolios to higher-yielding areas, increasing fee income, and cutting operational costs. The Reserve Bank of India's Monetary Policy Committee is expected to keep interest rates stable for now. This steady rate environment, combined with efforts in deposit management and loan repricing, should help support profit margins. Axis Bank's Managing Director, Amitabh Chaudhry, expressed confidence that the banking sector is well-equipped to handle a projected 15% credit growth, supported by strong balance sheets and technology investments.