India’s banking sector is heading into the March quarter earnings season with a broadly stable operating backdrop, but emerging structural pressures around funding costs and deposit mobilisation are beginning to test profitability dynamics. While headline numbers are unlikely to show sharp deterioration, the underlying trends suggest a more nuanced picture for investors and policymakers alike.

Recent data released by the Reserve Bank of India highlights a persistent divergence between credit and deposit growth. Loan growth stood at 13.6 percent as of mid-March, while deposit growth lagged at around 11 percent. This mismatch has pushed the system-wide credit-deposit ratio to 83 percent by the end of 9MFY26, indicating tighter liquidity conditions within the banking system.

This imbalance is not cyclical alone but increasingly structural. A shift in household savings behaviour, with flows moving toward higher-yielding instruments such as equities and mutual funds, has weakened the traditional deposit franchise of banks. As outlined in recent research commentary, this trend is particularly visible in the decline of low-cost CASA deposits, which are critical for maintaining margins.

To bridge the funding gap, banks have increasingly relied on term deposits and wholesale funding instruments such as Certificates of Deposit. While these sources provide liquidity support, they come at a higher cost, directly impacting banks’ cost of funds. The shift away from CASA toward term deposits has also led to a compression in CASA ratios across the system, further tightening margin buffers.

The Reserve Bank of India’s cumulative 125 basis point rate cut was expected to provide some relief on the funding side. However, the transmission has been uneven. Lending rates have adjusted more quickly due to their linkage with external benchmarks, while deposit rates remain relatively sticky due to fixed tenures. RBI Governor Sanjay Malhotra recently acknowledged that only about 90 basis points of rate cuts have been transmitted on the lending side, while deposit rate adjustments have been slower and less uniform.

This asymmetry has created a challenging environment for banks. As lending yields adjust downward faster than deposit costs, net interest margins are coming under pressure. Analysts expect margins to remain largely flat or slightly weaker in the March quarter, reflecting this lag effect.

Private sector banks are expected to show divergent trends. Larger lenders such as HDFC Bank and ICICI Bank are likely to report broadly stable margins, supported by diversified liability franchises. In contrast, Axis Bank and Kotak Mahindra Bank may see some compression due to higher funding costs and competitive pressures in deposit mobilisation.

Among public sector lenders, State Bank of India, Bank of Baroda, and Union Bank of India are expected to maintain stable margins, reflecting their relatively stronger deposit franchises. However, banks like Bank of India could see modest margin pressure.

An exception could be Federal Bank, which may report a one-time earnings boost from a tax refund, masking underlying margin trends.

From a broader market perspective, the Indian banking sector remains fundamentally stable. Asset quality continues to be strong, and there are no signs of systemic stress in loan books. However, the evolving funding landscape introduces a new layer of complexity that could influence earnings trajectories over the medium term.

For Indian markets, this dynamic has two key implications. First, banking stocks may see limited re-rating potential in the near term unless margin pressures ease or deposit growth accelerates. Second, the competition for deposits could intensify further, potentially leading to higher deposit rates and tighter system liquidity, which may have spillover effects on broader credit conditions.

At a sector level, the divergence between credit and deposit growth is likely to remain a key theme. Banks with strong liability franchises and higher CASA ratios are better positioned to navigate this phase, while others may face sustained pressure on profitability metrics.