The Indian banking sector will still have to face challenges with persisting NIM pressures and higher credit costs despite the pause in the repo rate announced by the Reserve Bank of India (RBI). Axis Securities highlights the outlook for the banking sector: “The near-term outlook for banks continues to remain challenging with persisting NIM pressures and higher credit costs.”
The RBI kept the repo rate unchanged at 5.50 in its August meeting after a 50 bps jumbo rate cut in the June meeting before that. Axis Securities said that because of the three consecutive cuts leading to a 100 bps reduction since February, the banking sector had a tough first quarter of the financial year 2025–26, and the pressure is expected to continue in Q2 as well.
Axis sees Q2 as bottom for bank margins, barring more rate cuts
“Q1 was a tough quarter, with growth remaining muted and the impact of the repo rate cut being pronounced, resultantly weighing on earnings. With the full impact of the Jun’25.
rate cut of 50 bps yet to reflect in yields, NIM pressures will continue in Q2,” Axis noted. However, Axis Securities believes margins may bottom out in Q2, assuming there are no further rate cuts.
The benefits of deposit repricing, especially term deposits, are expected to show up from Q3 onwards. The June 2025 CRR cut is also likely to provide some relief to banks. While savings account (SA) rate cuts have started to lower cost of funds, the full benefits from term deposits are still awaited.
“Banks are expected to see margin improvement over H2, with deposit repricing and support from the CRR cut,” Axis added.
25-bps rate cut likely in upcoming meets, says Axis Securities
Axis Securities expects the RBI to opt for a 25-bps rate cut in the upcoming meetings, given a benign inflation forecast and continued focus on growth. Axis Securities continues to prefer private banks such as HDFC Bank, Kotak Mahindra Bank, ICICI Bank, City Union Bank, and Federal Bank. Among PSU banks, State Bank of India remains their top pick.
NIMs under pressure in Q1 as profitability takes a hit
Net interest margins (NIMs) — a key profitability indicator — came under pressure in Q1, especially for mid- and small-sized banks. These lenders reported a sharp fall in margins due to lower lending yields and continued stress in asset quality, which led to higher interest reversals.
PSUs like Bank of Baroda’s Global NIM stood at 2.91 per cent in Q1FY26, down from 3.18per cent in Q1 FY25. Punjab National Bank’s Global NIM stood at 2.70 per cent dropped from 3.07 per cent a year ago and Domestic NIM at 2.84 per cent. SBI is yet to announce its Q1 numbers on August 8.
Private banks like HDFC Bank reported it’s NIM at 3.35% down from 3.46 per cent QoQ. ICICI Bank said its net interest margin stood at 4.34 per cent in the quarter ended June 2025, compared with 4.41 per cent in the preceding March quarter and 4.36 per cent a year ago.
Credit growth may pick up ahead of festive season
Despite short-term challenges, Axis Securities sees a potential uptick in credit growth, especially during the festive season. Improving consumption and economic activity could act as key growth drivers.
“We believe return on assets (RoAs) for banks will bottom out in FY26. We continue to prefer banks with healthy deposit franchises, stable asset quality and strong management teams,” Axis said.