Impact of Middle East Conflict on Indian Banking Sector Earnings

The ongoing conflict in the Middle East is poised to negatively impact the earnings of the Indian Banking, Financial Services, and Insurance (BFSI) sector. HSBC has issued warnings about reduced growth and profit margins, favoring private banks over state-run institutions. Fitch Ratings also predicts increased margin pressures due to the Reserve Bank of India's limited capacity to manage rupee volatility. Target prices for major banks have been revised downward, reflecting these challenges. Despite concerns, HSBC suggests that rupee volatility may not significantly affect asset quality, as most loans are in local currency. Read on to understand the full implications for the banking sector.

By Narendra Chaudhary Apr 2, 2026, 11:10 IST

Earnings Performance Under Threat

The Banking, Financial Services, and Insurance (BFSI) sector is bracing for a downturn in earnings as March, the month marking the end of the financial year, has been significantly impacted by the ongoing conflict in the Middle East. HSBC has raised concerns regarding the earnings outlook for Indian banks and the BFSI sector as a whole, indicating a potential decline in growth, demand, and profit margins. The firm has expressed a preference for private banks over public sector banks and non-banking financial companies (NBFCs) due to these challenges.

Fitch Ratings has echoed these sentiments, suggesting that Indian banks may face increased margin pressures. The Reserve Bank of India's (RBI) capacity to provide local-currency liquidity has been constrained as it attempts to manage rupee volatility. If the tensions in the Middle East continue, sector margins could drop by 20 to 30 basis points below the current forecast of 3.1% for the financial year ending March 31, 2027 (FY27). As of March 29, 2026, the banking system's liquidity surplus has decreased to approximately 0.5% of deposits, down from 0.8% in late February, coinciding with the onset of the conflict. The rupee has also depreciated by 4.5%, and ongoing currency pressures may limit the RBI's ability to ease liquidity in the banking system.

Revised Target Prices for Major Banks

Banks' target price lowered

In its latest report, HSBC has revised the target prices for several banks. HDFC Bank's target has been adjusted from Rs 990 to Rs 840, while ICICI Bank's target price has been lowered from Rs 1630 to Rs 1470. Axis Bank's target has been reduced from Rs 1580 to Rs 1420, and IndusInd Bank's target price is now Rs 880, down from Rs 1110. Kotak Mahindra Bank's target has also seen a decrease, falling to Rs 420 from Rs 490. State-owned banks have not been spared either, with the State Bank of India's target price cut from Rs 1250 to Rs 1120 and Bank of Baroda's target adjusted from Rs 340 to Rs 275.

Rupee Volatility and Its Effects

Rupee volatility to impact banks' profitability?

HSBC's analysis indicates that while rupee volatility may not have a significant direct impact on Indian banks, the overall system is primarily denominated in local currency. Foreign loans constitute less than 10% of total sector loans, and the net open foreign-currency position is relatively minor at 2.5% of equity as of the first nine months of FY25. The firm does not anticipate that currency depreciation alone will substantially affect asset quality, as corporate borrowers generally hedge their foreign-currency borrowings.