Despite RBI’s latest repo cut, private banks see margins holding up in Q4
Private sector banks are poised to maintain stable net interest margins in Q4 FY26, despite a 25-bps Reserve Bank of India rate cut in December.
Private sector banks are signalling that net interest margins (NIMs) are likely to remain resilient in the March quarter, even as the Reserve Bank of India’s (RBI's) 25 basis point (bps) repo rate cut last month begins to transmit more fully into lending rates.
Management commentary from the December quarter earnings season of major private banks suggests that margins will be cushioned by factors such as a lag in deposit repricing, a higher share of low-cost current account savings account (Casa) funds, and more selective lending.
HDFC Bank, which saw its NIM on total assets expand by 8 bps on quarter to 3.35% in the three months ended December, indicated that the full impact of the latest rate cut is yet to be felt completely.
The first 100 bps of repo rate cuts have been factored in, but the most recent 25 bps reduction is still working its way through the system, chief financial officer Srinivasan Vaidyanathan said in the post-earnings call on Saturday.
“….some of that (25 bps rate cut) is factored in the December quarter, and some of that, between one to three months, will start to flow in at the repricing cycle. So, some will come," he said.
He said that a decline in the cost of funds of about 10-11 bps supported margins, outlining three key drivers of margins going forward: cost of funds, Casa trends, and borrowings.
- Private sector banks successfully expanded or maintained margins in Q3 FY26 despite a cumulative 125 bps in rate cuts over the year.
- The primary defence mechanism is the time lag between immediate loan repricing and the slower repricing of term deposits.
- Banks like Federal and HDFC are aggressively prioritizing low-cost Casa deposits to offset falling asset yields.
- RBL Bank is using a high proportion of fixed-rate loans to lock in higher yields as market rates drop.
- Ratings agencies suggest a broad industry recovery in NIMs is a story for FY27, making Q4 FY26 a period of defence rather than growth.
ICICI trails peers
ICICI Bank struck a cautious but steady tone, with executive director Sandeep Batra saying on Saturday that the private sector lender expects NIMs to remain more or less range-bound, given the repricing of external benchmark loans and investments, as well as competitive intensity.
India’s second largest private sector lender reported NIM of 4.3% in Q3 of FY26, unchanged from the previous quarter and five bps higher in the same period a year ago.
"This would get in part offset by retail term (deposit) repricing, and we will continue to watch the market conditions," Batra said, adding that any further changes in monetary policy would influence the NIM trajectory, even as the bank remains focused on “maximizing all levers of profits, and NIM is certainly one of the important levers."
However, analysts at Bernstein flagged that “loan and deposit growth trailed system trends, while margins remained flat on quarter—at odds with peer banks that reported sequential improvement," they said in a note on 17 January.
At RBL Bank, management pointed to portfolio mix and fixed-rate loans as buffers against immediate margin compression.
While much of the transmission of earlier rate cuts has already played out on the asset side, deposit-side repricing is still underway, giving banks room to lower deposit rates. RBL Bank’s NIM rose to 4.63% in the December quarter from 4.51% in the previous quarter.
“Our composition of the fixed rate loan is around 40-45%, which is going to remain at that stage, and which will also be in a position to hold the yield at this position," managing director (MD) and chief executive officer (CEO) R. Subramaniakumar said.
“Our cost of deposit is coming down, which will start providing us more headroom from Q4 as we move forward," he said.
The Federal surprise
Federal Bank delivered one of the sharpest margin surprises in the December quarter, with NIM at 3.18%, up 12 bps sequentially, aided by a better deposit mix and loan repricing.
However, managing director and chief executive officer K.V.S. Manian cautioned that the full impact of the latest 25 bps cut will be felt in the March quarter. “We have to see how to mitigate the impact of that through the next quarter," he said.
Also, as loan growth normalizes, Federal Bank is looking to reduce its reliance on expensive deposits, such as fixed deposits (FDs).
Analysts remain constructive but measured in their outlook for Federal Bank’s margins. Brokerages such as Motilal Oswal Financial Services and Elara Capital India also said that the bank’s December-quarter NIM beat expectations, driven by lower cost of funds and a rising Casa ratio, which improved to about 32%.
They expect margins in the March quarter to remain broadly stable, even as rate cut transmission continues, supported by ongoing deposit repricing and a focus on medium-yield segments, though the durability of margins will depend on competitive intensity and funding conditions.
Additionally, YES Bank said it is confident it can maintain margins at the current level for the next three months. For the December quarter, its NIM was at 2.6%.
“With the recent rate cut of 25 bps, the entire impact would come in the current quarter. So we are confident that we would be able to protect the margins at the existing level," MD and CEO Prashant Kumar said, adding that the bank is taking additional measures to improve margins.
“At this point in time, I would not give any specific guidance, but definitely one part is clear that NIM would continue to improve going forward," he said.
System-level trends also offer some context. On 14 January, India Ratings & Research said that, while deposit repricing is ongoing following cumulative rate cuts of 125 bps since February 2025, any meaningful improvement in NIMs is likely to be delayed until the end of FY26 or early FY27, aided by liquidity-easing measures.
For now, banks appear focused on defending margins quarter by quarter, using deposit management and portfolio mix as their first line of defence.
Shayan Ghosh also contributed to the story.
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