The Reserve Bank of India's flexibility to inject local-currency liquidity into the banking system has narrowed significantly amid efforts to contain rupee volatility, according to a Fitch Ratings report published Thursday. Margin pressure for Indian banks could increase by 20-30 basis points below current forecasts if higher funding costs persist due to Middle East tensions. The central bank has already implemented 125 basis points of policy rate cuts since December 2024, but only 44 basis points have been transmitted to deposit rates as of January 2026.
The rupee settled at 94.81 per dollar on the final trading day of FY 2025-26, showing continued pressure. This liquidity constraint could impact the banking sector's ability to support various financial services, including crypto-related banking operations that have been contentious between RBI and the industry.
