Foreign currency deposits squeeze private bank margins in Q2

HDFC Bank, ICICI Bank and Axis Bank all posted lower net interest margins (NIMs) in their second quarter results for FY27, reflecting the impact of elevated foreign currency non-resident (FCNR(B)) deposit inflows that have accumulated over recent months.

The three lenders have been drawing substantial FCNR(B) deposits, which typically carry higher interest rate obligations compared to domestic rupee deposits. This shift in deposit composition has pressured their core interest margins, a key profitability metric that measures the difference between interest earned on loans and interest paid on deposits.

While the sequential NIM contraction was evident in Q2 results, senior management at the banks signalled optimism about margin recovery in coming quarters. As FCNR(B) funds are progressively deployed into loans and other productive assets, the impact on profitability is expected to ease. The deployment cycle and the pace of interest rate changes will be critical factors determining the timeline for margin normalization.

The margin pressure comes as the banking sector navigates changing deposit dynamics and evolving interest rate conditions. Private banks have been competing intensively to gather retail deposits, with FCNR(B) inflows representing a significant source of stable, long-term funding despite the temporary margin headwind.