The Reserve Bank of India's latest monthly bulletin for September 2026 has provided crucial clarification on the credit-deposit ratio, stating that a high CD ratio alone does not indicate banking system vulnerability. According to the RBI bulletin, growth in bank credit has majorly outpaced that of aggregate deposits, pushing the credit-deposit (CD) ratio above 80% since FY23. The central bank emphasized that deposits are created concurrently with lending in the modern monetary system, meaning banking systems might not necessarily need to mobilize liabilities such as deposits before extending credit. Banks eventually decide to extend credit based on their profitability considerations, within the regulatory framework, where lending offers better risk-adjusted returns than alternative uses of funds.
SBI Chairman C S Setty has reinforced the banking sector's critical role in India's economic expansion, stating that stronger bank profitability, credit demand and asset quality give the sector greater capacity to support investment and India's next stage of growth. Speaking at the 13th SBI Banking and Economics Conclave 2026, Setty emphasized that as the economy expands, the banking sector has a significant role in financing infrastructure, enterprise, innovation and the broader transformation of the productive economy. He noted that moving from being an emerging economy to becoming a leading economic force requires us to look beyond the strength of the present cycle, with the next wave of global investment likely shaped by sunrise sectors, renewables, mini-condensers, battery storage, and green hydrogen where India has significant technological capabilities.
Recent RBI data reveals robust growth momentum in the banking sector, with bank loans growing at 19% year-on-year at the end of August, while deposit growth reached a 16-year high of 17.8%. According to Business Standard, gross non-performing assets have improved to a multi-decade low of 1.8%, demonstrating the sector's strengthened fundamentals. Setty highlighted that despite the challenging external environment, real GDP grew by 7.8% during the April-June quarter of 2026, supported by strong domestic demand and gains in manufacturing and services. The financial sector has reinforced this momentum, with the banking system's health at a once-in-a-decade high.
JPMorgan's Anuj Singla has positioned private sector banks as the most attractive investment opportunity in the current rising interest rate environment. According to CNBC TV18, Singla stated that "Our base case is 50 basis points rate hikes over the next 12 months, and we believe in a rising rate environment, the private sector banks, which have de-rated quite a bit, should be the key part of the call." The investment bank expects net interest income (NII) growth to accelerate from 5-6% last year to 13% this year and further to 15-16%, with valuations trading below long-term averages offering compelling risk-reward dynamics. Recent leadership transitions at private banks are viewed as short-term blips rather than structural concerns, with historically such changes not leading to sustainable growth declines when asset quality remains robust.
Foreign Currency Non-Resident (FCNR) deposits have delivered a massive positive surprise, reaching $127 billion, easily surpassing street forecasts of $60 to $80 billion and JPMorgan's own higher-end expectation of $82 to $100 billion. As reported by CNBC TV18, this liquidity injection could provide an additional boost to bank earnings, particularly in FY28, though deploying this liquidity will take a couple of quarters, potentially causing a near-term net interest margin (NIM) impact of 5 to 15 basis points due to negative carry or lower incremental spreads. Investors should focus on NII and Pre-Provision Operating Profit (PPOP) growth, which could drive low single-digit earnings upgrades for FY28.
The banking sector faces key dynamics that could influence its trajectory over the next few quarters, with the key controversy to watch being how market share dynamics play out between public and private sector banks. For private sector banks, leadership changes at HDFC Bank could help address governance concerns and provide greater clarity on the bank's longer-term direction, while Kotak Mahindra Bank's new CEO could potentially influence the bank's growth trajectory by delivering sustained growth above system levels. According to Business Standard, as the economy moves towards higher-value manufacturing, new technologies, the green transition and globally competitive enterprises, the financial sector has an important role to play in enabling innovation in supply chain architecture and supporting India's transition to become a leading economic force.
