Moody’s says that rate hikes won’t have much of an effect on the profits of Indian banks. 

BENGALURU – Moody’s (NYSE:MCO) Investors Service said that the Reserve Bank of India’s many rate hikes this year will help raise banks’ net interest margins, but the increase will be limited because funding costs will rise faster than loan rates.

Since its first unplanned mid-meeting increase in May, the RBI has raised rates by a total of 190 basis points, and more increases are likely to come.

Moody’s said in a note on Wednesday that India’s economic growth will slow, but that its growth prospects are better than those of its peers.

The ratings agency said that as yields go up, banks would also lose money on the government securities they own, which would cut into their profits.

“NIMs (net interest margins) will go up by about 15–25 basis points, which is less than the rise in interest rates,” it said.

Moody’s said that tight liquidity will force banks to raise their deposit rates faster than their lending rates. Competition for good borrowers will also keep lending rates from going up.

The agency also said that the quality of loans to small and medium-sized businesses, which are the most likely to be hurt by higher costs of capital, would go down, while corporate and retail loans would be mostly stable.

Separately, an S&P Global (NYSE:SPGI) Market Intelligence report found that Indian banks did better than their Asia-Pacific peers in the quarter that ended on September 30. Their stocks had some of the highest total returns because they had strong financial metrics and good growth prospects.

In the third quarter, the Nifty Bank Index went up 15.6%, which was a lot more than the Nifty 50 Index, which went up 8.3%.