India Set to Retain Crown as G-20's Fastest-Growing Economy, Banking Sector Remains Robust
India is firmly on course to continue as the fastest-growing economy among G-20 nations in the upcoming financial year, according to a comprehensive report by Moody's Ratings. The country's real GDP is projected to expand by a robust 6.4% in fiscal year 2026-27, solidifying its leadership position in global economic growth.
The influential ratings agency also delivered an optimistic outlook for India's banking sector, predicting stability over the next 12 to 18 months thanks to this highly supportive economic environment. Moody's asserts that banks will sustain steady and resilient performance, underpinned by a combination of solid asset quality, strong capital buffers, healthy profitability metrics, ample liquidity, and consistent government support.
Key Drivers of Banking Sector Strength and Growth
Improving Asset Quality: Asset quality across the banking system is expected to remain broadly stable, with the systemwide non-performing loan (NPL) ratio forecasted to stay at a low range of 2% to 2.5%. Corporate loans, in particular, are anticipated to continue performing exceptionally well. Moody's attributes these low NPL levels to steady economic expansion and relatively low borrower leverage. Furthermore, corporate asset quality is demonstrating remarkable resilience.
Loan Quality Stability: The quality of retail and MSME (Micro, Small, and Medium Enterprise) loans should remain stable, although outcomes may vary to some extent among individual lenders based on their specific underwriting standards and target borrower groups.
Supportive Macroeconomic Environment: The brokerage highlighted that structural policy steps, including the ongoing rationalisation of the Goods and Services Tax (GST) and recent cuts to income tax, are poised to encourage and bolster domestic consumption. Monetary policy is likely to stay steady, with financial conditions remaining broadly supportive for growth. Moody's also noted that following the trade deal reached by India and the United States in February 2026, operating conditions for export-oriented MSMEs are expected to improve gradually, thereby reducing the likelihood of additional financial stress in this segment.
Strong Capital Levels: Capital levels within the banking sector are anticipated to remain firm and resilient. Internal accruals are expected to adequately match capital consumption and comfortably fund projected loan expansion of 11% to 13%. Capital ratios are already well above regulatory minimums, providing a significant safety cushion.
Steady Profitability: Earnings performance is unlikely to experience sharp swings or volatility. Moody's expects the return on assets (ROA) for banks to hover consistently around 1.2% to 1.3%. The brokerage further anticipates that net interest margins (NIMs) will widen slowly as banks progressively incorporate the rate cuts implemented in 2025 into their deposit pricing structures.
Loan-Loss Provisioning: Moody's expects loan-loss provisioning to stabilise after rising from historically low levels. However, floating provisions are set to increase as banks proactively prepare for the upcoming transition to the IFRS 9 Expected Credit Loss (ECL) accounting framework. Loans and deposits are projected to grow in tandem, keeping the systemwide loan-to-deposit ratio near the 80% mark.
Adequate Funding and Liquidity: In terms of financial resources, the ratings brokerage believes credit growth and deposit growth will broadly move together, maintaining the loan-to-deposit ratio close to 80%. System liquidity should remain adequate under prevailing regulatory norms and requirements.
Government Support: Moody's also pointed to the continued and crucial role of state backing. It expects the Indian government to extend a very high degree of support to public sector banks, while the extent of assistance for private sector lenders would largely depend on their individual systemic importance and market footprint.
Notable Challenge Identified
However, the report did flag one significant challenge facing the sector: the intensifying battle for deposits. Mobilising funds, especially in low-cost current and savings accounts (CASA), may prove increasingly difficult amid fierce competition from both traditional banks and newer financial entities.
This detailed analysis from Moody's Ratings paints a picture of an Indian economy not only leading growth among the world's major economies but also fostering a banking sector characterised by stability, strength, and resilience, ready to support the nation's continued economic ascent.
