Net interest margins at Indian banks are expected to stabilize in the coming quarters as the rate-cut cycle pauses, although weak deposit growth may hinder this stabilization.
Margins stayed relatively flat in the October–December quarter sequentially in 2025. However, most lenders posted year-over-year declines in net interest margins (NIMs) as they passed lower rates to borrowers, while deposits typically take longer to reprice.
The Reserve Bank of India cut its benchmark rate by 125 basis points in 2025, including two 50-bps cuts in the first half of the year. The central bank followed with a 25 bps cut in December, before pausing at its last review in February. Analysts interpret the central bank's stance as dovish, reinforcing expectations that the easing cycle has ended.
"Policy rate cuts appear to be in the rearview mirror for the foreseeable future, ensuring a shallower bottom and an earlier inflection point for bank margins," BNP Paribas Securities said in a Feb. 12 research note. NIMs at large private sector banks may have "bottomed out" in the fiscal third quarter of the financial year ending on March 31, and earnings growth may accelerate in the first half of the next fiscal year, BNP said.
NIM compression
Four of the six largest state-owned and private sector lenders reported sequential NIM compression, according to S&P Global Market Intelligence data. Punjab National Bank's NIM slipped 2.32% in the December 2025 quarter from 2.67% a year ago. HDFC Bank Ltd.'s NIM fell to 3.80% from 3.85%, while Axis Bank Ltd.'s NIM decreased to 3.54% from 3.80%.
Earnings at all lenders in the sample, except ICICI Bank Ltd., increased in the third quarter, compared with a year ago, Market Intelligence data show. HDFC Bank, India's biggest lender by market capitalization, posted a 12.18% gain to 198.07 billion Indian rupees. Punjab National Bank's income rose 15.72% to 55.56 billion rupees, the highest pace of growth in the sample.
"For the full financial year, our domestic NIM will remain at about 2.70%, subject to no further rate cuts in the financial year ending March 2026," Ashok Chandra, MD & CEO of Punjab National Bank, said in a post-earnings interaction. It would take another three to four months to mitigate the NIM impact, Chandra said.
Extended pause
The Reserve Bank of India will likely keep policy rates on hold for an extended period unless the global growth environment changes significantly, ICICI Bank analysts said in a Feb. 6 report. Given the Reserve Bank of India's inflation projections for the first half of the fiscal year starting April 1, the real rate is about 1.1%, leaving limited room for further cuts.
"As a result, an extended pause is likely," ICICI Bank said in the report posted on social media.
Asset quality at state-owned banks remained stable, with nonperforming loan ratios at multiquarter lows, narrowing the gap with private lenders.
Aggregate credit growth at Indian banks accelerated to 14.5% at the end of December 2025 from 11.3% at the end of October 2025, data on the Reserve Bank of India's website show. Deposit growth has risen to 12.7% from 9.7% over the same period.
Household deposits have not kept pace with loan demand as financial savings increasingly shift toward market-linked instruments, according to the ICICI Bank report. Banks are therefore relying more heavily on wholesale deposits, which entail greater regulatory compliance and require larger bond holdings to maintain liquidity coverage ratios.
As of Feb. 17, US$1 was equivalent to 90.65 Indian rupees.
