India's Banking Resilience Amid US Tariff Shifts

A global rating agency noted that despite US tariff changes, India's banking stability is sustained due to low, diversified exports. Moody's highlights a stable outlook driven by government fiscal measures and internal capital generation. However, asset quality faces moderate risks with anticipated declines in net interest margins.

Despite recent US tariff adjustments, India's banking system remains steady, thanks to its diversified and minimal exports. Moody's Investors Service expects limited credit repercussions for Indian banks, bolstered by government-driven fiscal policies such as capital expenditure, middle-income tax cuts, and monetary easing.

While the agency forecasts stable prospects for India's banking sector, it anticipates a potential decline in asset quality. Factors contributing to this include rising stress in unsecured retail, microfinance, and small business loans. The profitability of banks may face challenges by the fiscal year 2025 due to gradual reductions in net interest margins.

Nevertheless, Indian banks are expected to sustain strong capitalisation levels, supported by robust internal capital generation and abundant access to a domestic equity market. Icra Ratings, a domestic rating agency, indicates non-bank lenders will leverage their capital and strong earnings to meet loan quality challenges and regulatory changes, albeit with a moderated growth rate projected at 16-18% in FY26.

(With inputs from agencies.)