Banks' margins have been dipping in recent months as deposit costs have risen. This is due to a number of factors, including the Reserve Bank of India's (RBI) monetary policy tightening cycle, which has led to higher interest rates. As a result, banks have had to increase the interest rates they pay on deposits in order to attract and retain customers. This has increased their cost of funds, which has squeezed their margins.
According to rating agency Crisil, net interest margins (NIMs) for the banking sector are expected to decline by 10-20 basis points (bps) this fiscal year, reaching 3.0-3.1%. This would be the lowest NIM level since FY17.
The decline in NIMs is likely to have a negative impact on banks' profitability. However, it is important to note that other factors, such as loan growth and credit costs, will also impact profitability. Overall, the outlook for banks' profitability is mixed.
Here are some of the factors that are contributing to the rise in deposit costs:
- The RBI's monetary policy tightening cycle.
- The increase in competition for deposits from non-bank financial institutions (NBFIs).
- The rise in inflation, which has led to higher interest rates on fixed deposits.
The rise in deposit costs is likely to continue in the near term, as the RBI is expected to continue with its monetary policy tightening cycle. This will put further pressure on banks' margins. However, the long-term outlook for banks' profitability is positive, as the economy is expected to grow at a healthy pace in the coming years. This will lead to increased demand for loans, which will help to boost banks' profits.
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