Indian banks are among the most exposed lenders in the Asia-Pacific region, according to a report by Moody’s. This is due to the country’s heavy dependence on energy imports from West Asia. The disruption around the Strait of Hormuz is pushing oil prices higher and increasing inflationary pressures, raising interest rates and weakening borrowers’ repayment capacity in India.
“Indian banks are among the more exposed in the region, given the economy’s high dependence on energy imports from the Middle East and the consequent pressure on inflation, interest rates and borrower cash flows,” Moody’s said in the report according to PTI.
“Our new central scenario reflects a sustained Strait of Hormuz disruption through the third quarter of 2026, with oil prices averaging $90- 110 per barrel during much of the year,” Moody’s said according to PTI.
Moody expects financial conditions to remain relatively tight across energy-importing economies. Lower economic growth, higher rates and inflation in some markets, and local currency pressures will negatively impact APAC banks’ loan quality and profitability, it noted.
Unsecured retail loans may worsen: Moody’s
India’s non-bank lenders face particular pressure, given their large exposure to unsecured retail loans, where asset quality deterioration is expected, Moody’s said.
Also, Indian banks’ sizeable agriculture exposure should see only modest deterioration, as adequate fertiliser stockpiles limit import cost shocks, though higher diesel prices will still pressure farm cash flows.
On the positive side, Indian banks enter this period with good capital and provisioning buffers, positioning them well to absorb credit losses without threatening solvency, Moody’s said.
RBI faces pressure to raise rates: Moody’s
“The central bank in India faces pressure to raise rates to contain inflation and currency weakness, which will raise banks’ funding costs and amplify risks to credit quality,” the agency added.
The Reserve Bank of India is scheduled to meet between June 3 and June 5. This will be RBI’s second meeting since Iran-US war has escalated. In the April meeting, RBI kept the repo rate unchanged at 5.25% while retaining a “neutral” policy stance.
Economists at MUFG Bank also expect the RBI to start rate hikes at this meeting and continue them in the August meeting as well. “We now forecast the RBI hiking rates by at least 50 bps this fiscal year, bringing the terminal repo rate to 5.75%,” MUFG said.
With the inputs from PTI