Why Are Indian Banks’ Profit Margins Falling?

Imagine a bank getting cheaper money but still earning less profit on every rupee it lends. Sounds strange, right? In June 2026, the RBI introduced a special dollar-swap window that encouraged Indian banks to attract NRI dollar deposits. Around $133 billion reportedly flowed through this mechanism. But here’s the twist. Banks could bring dollars to the RBI, receive rupees, and avoid the usual currency-hedging cost. This made the deposits cheaper than comparable domestic funding. However, some NRIs used borrowed money to create these deposits. Banks’ deposit growth therefore looked stronger than their underlying business growth. Think of it like a shopkeeper borrowing money to fill the shop. The shop looks bigger, but that doesn’t automatically mean sales or profits have increased. Banks then used the rupees to lend in India, where lending rates are generally higher. Yet the overall impact depends on funding costs, loan demand, competition and how efficiently the money is deployed. That’s why strong deposit growth does not automatically mean stronger profitability. Falling net interest margins (NIMs) tell investors to look beyond headline numbers. ICICI Bank Ltd.

ICICI Bank is worth tracking to understand how deposit growth, lending margins and funding costs affect a large private bank. Investors should examine its core deposit growth excluding special FCNR inflows, NIM trends, credit quality and return on assets before drawing conclusions. A bigger balance sheet is not always a more profitable business. Follow the quality of growth, not just the size. Deposit growth can look impressive, but investors must examine funding costs, core deposits, margins and asset quality before judging bank profitability.