'Bank NIMs to bottom out in Q2 as benefits of rate cut kick in': Analysts

Mumbai: Net interest margins (NIM), or core profitability, at Indian lenders are set to edge higher after having bottomed out in the second quarter, with analysts saying that an increasing likelihood of steady policy rates should allow lenders to finally benefit from lower costs in the current cycle of rate easing.

With the Reserve Bank of India (RBI) expected to hold rates steady for an extended period, analysts say banks' net interest margins (NIMs) are likely to bottom out by the end of the September quarter, with the benefits of policy easing kicking in from the third quarter onward.

Over the past two quarters, banks have passed on the full 100 bps rate cut to homebuyers and small businesses, and about 30 bps on other loans. But they are now beginning to benefit from lower deposit costs.

"Liquidity surplus in the banking system has enabled smoother transmission in the current rate-cut cycle, with deposit repricing on fresh term deposits keeping pace with loan repricing," said Pranav Gundlapalle, head of India financials at Bernstein. "With most of the 100 bps rate cut set to be priced in by the September quarter, we expect NIMs to bottom out during the period."

For the sector overall, NIM fell 25 bps YoY to 2.89% in the June 2025 quarter, from 3.15% a year earlier. The decline was driven by subdued credit growth, deceleration in CASA deposits, and faster transmission on loans than deposits, compressing spreads.



"The NIM compression is being cushioned by multiple tailwinds," said Santanu Chakrabarti, analyst-banking and finance, BNP Paribas India. "These include stronger current account momentum as liquidity improves, better savings account traction as the gap with term deposit rates narrows, and repricing of TD and short-term CDs as funding costs ease."

Among large private lenders, HDFC Bank's NIM fell 12 bps year-on-year, ICICI Bank's by 2 bps, and Axis Bank's by 25 bps. Public-sector banks saw sharper declines, with SBI reporting a 32 bps fall, Bank of Baroda 27 bps, and Canara Bank 35 bps.

"We believe that NIMs will remain under pressure through the first half of the fiscal year and partially into the December quarter, driven by continued loan repricing," said Nitin Aggarwal, head of BFSI at Motilal Oswal Securities.