Banks Brace for Margin Squeeze Amidst Rate Cuts

Management commentary from the December quarter earnings season indicates that private banks' net interest margins (NIMs) are likely to be supported by several factors. These include a lag in deposit repricing, a larger share of low-cost current and savings accounts (Casa) funds, and more selective lending practices. HDFC Bank reported an 8 basis points increase in NIM on total assets for the quarter, with its CFO noting that the full effect of the latest 25 bps rate cut is still working its way through the system.

ICICI Bank expects NIMs to remain largely range-bound, balancing the repricing of external benchmark loans against competitive intensity and deposit repricing. Similarly, RBL Bank and Federal Bank saw their NIMs rise in the December quarter, attributing this to portfolio mix, loan repricing, and a better deposit mix. However, Federal Bank's management cautioned that the full impact of the recent 25 bps rate cut would be evident in the March quarter.

Analysts, while generally constructive, are observing system-level trends that suggest a meaningful NIM improvement might be delayed until late FY26 or early FY27. Banks are actively managing their funding costs and deposit strategies to mitigate the impact of ongoing monetary policy shifts. YES Bank expressed confidence in maintaining current margin levels for the next three months, despite the full transmission of the latest rate cut expected in the current quarter.