Indian banks experienced significant margin compression during the March quarter, primarily due to the 25 basis points repo rate cut in December. According to brokerage firm Systematix, the full impact of this rate reduction flowed through to the Yield on Advances (YoA), creating pressure on Net Interest Margins (NIMs). For State Bank of India, Axis Bank, and Indian Bank, the sequential decline in Yield on Advances was steeper than peers, resulting in sequential contraction of NIMs for these banks.
The crisis in West Asia has resulted in a rise in crude oil prices, severely affecting many energy-dependent economies in Asia. India is no exception, with the effects visible in monthly inflation numbers. Rising crude and fertiliser costs, combined with weaker monsoon forecasts, could drive food and fuel inflation higher and complicate RBI's growth-inflation balancing act. According to CNBC-TV18, these domestic factors are likely to pose upside inflationary risks, adding to the challenges facing the banking sector. Recent developments suggest that with state elections now behind us, investors could see measures like higher fuel costs, tighter curbs on gold imports, and stricter controls on overseas spending flows that may lead to higher inflation and a temporary slowdown in the economy.
Large private banks demonstrated resilience in maintaining stable NIMs with slight upward bias. As reported by Systematix, ICICI Bank improved by 2 bps and HDFC Bank by 3 bps quarter-on-quarter. In contrast, public sector banks faced sharper compression, with SBI's NIM falling 17 bps QoQ to 2.81% and Union Bank's declining 12 bps to 2.64%. The higher share of EBLR and T-bill-linked loans in PSBs bore the brunt of the rate cut impact.
India faces mounting pressure from Foreign Portfolio Investors (FPIs) who have already withdrawn over ₹2 lakh crore this year, while rising oil prices amid the West Asian crisis threaten to push India's Current Account Deficit to nearly 2% of GDP. According to UNCTAD data, while global FDI rose 14% to $1.6 trillion in 2025, flows to developing economies declined by 2%, reflecting an increasingly fragmented and geopolitical global capital order. This structural currency weakening forces a restrictive monetary stance, with the threat of sudden supply disruptions amplifying economic uncertainties.
Asset quality across the coverage banks remained broadly stable during the quarter. According to Systematix, most coverage banks reported net slippage ratio below 80 basis points, with the exception of IndusInd Bank. IndusInd led improvement with an 85 bps QoQ drop to 2.2% as stress in the microfinance segment eased, followed by Kotak Mahindra and Axis Bank. Credit costs were mixed as banks created buffer provisions amid geopolitical uncertainty, with ICICI Bank posting the lowest credit cost at 0.03%.
