Indian banks face a Q2 paradox: FCNR boosts loan growth but margins shrink

What happened: Indian banks enter Q2FY27 earnings with stronger loan growth and lower credit costs offset by weaker margins and a less favourable funding mix, as FCNR(B) deposit flows under the RBI swap window lift headline numbers. Key numbers: System credit growth 19% y/y in August 2026 vs 11% a year earlier. Deposit growth 17.3% as of Sept. Why it matters: Analysts say headline growth overstates underlying momentum, making bank selection key. Kotak prefers large private banks, citing stronger balance sheets and easing non-financial overhangs, and expects full FCNR benefit by Q3.

Indian banks enter Q2FY27 earnings with stronger loan growth and lower credit costs offset by weaker margins and a less favourable funding mix, as FCNR(B) deposit flows under the RBI swap window lift headline numbers.

Analysts say headline growth overstates underlying momentum, making bank selection key. Kotak prefers large private banks, citing stronger balance sheets and easing non-financial overhangs, and expects full FCNR benefit by Q3.