Indian banks are facing mounting pressure to mobilize deposits as their credit-to-deposit ratio reached an all-time high of 81.75% as of December 31, according to Reserve Bank of India data. This ratio indicates that banks lent ₹81.75 for every ₹100 of deposits mobilized, highlighting the growing imbalance between credit demand and deposit supply.

Record High Ratio Signals Funding Pressure

The elevated CD ratio reflects the challenges banks face in attracting deposits while meeting robust loan demand. Currently, banks must allocate significant portions of deposits to regulatory requirements before lending becomes possible.

While the RBI does not prescribe a specific cap for the CD ratio, it has urged lenders to maintain adequate liquidity buffers to meet unexpected withdrawals.

Deposit Growth Lags Behind Credit Expansion

The fundamental challenge stems from the divergent growth rates between credit and deposits. Bank credit demonstrated stronger momentum compared to deposit mobilization during the period.

This growth differential has created the current funding pressure, forcing banks to compete more aggressively for deposits.

Competitive Investment Environment

Banks face stiff competition from alternative investment options that offer more attractive returns. Small savings schemes currently provide 7.10% for three-year deposits, significantly higher than the 6.40-6.50% offered by banks. The challenge intensified after the RBI cut its policy rate by 125 basis points since February 2025, prompting lenders to reduce deposit rates further.

Alternative Funding Solutions

Banks are actively exploring alternative funding mechanisms to address the CD ratio challenge. They have requested the RBI to include bond borrowings in the CD ratio calculation, which would help bring the ratio below 80%. Currently, only deposits and certificates of deposit are considered for computing the ratio.

"To overcome this challenge, banks will have to explore alternative sources such as bond issuance to finance credit growth," said Saurabh Bhalerao, associate director and head of BFSI Research at Care Ratings. "The pace of investments in government securities has slowed, implying banks are deploying funds for lending."

Fresh investments in government securities dropped significantly to ₹1.87 lakh crore on a year-to-date basis until December, compared with ₹4.89 lakh crore in the same period a year earlier.

Future Outlook and Liquidity Support

Bank of Baroda chief economist Madan Sabnavis noted that "ideally, one should look at a broader denominator that includes borrowings and owned funds when calculating the CD ratio." He emphasized that a high CD ratio indicates efficient use of resources, as the number is derived after meeting regulatory requirements.

Banks have maintained nearly 8% higher Statutory Liquidity Ratio (SLR), mostly to comply with Liquidity Coverage Ratio regulations. Looking ahead, industry officials expect the ratio to moderate as deposit growth picks up, supported by substantial liquidity infusion by the RBI. Durable liquidity infusion has pushed reserve money growth to 9.40% (adjusted for CRR cut) as of December 2025, from 6.00% a year earlier.

Market analysts have identified 10 banking sector stocks that could potentially deliver returns exceeding 17% over the next one year, despite ongoing concerns about Foreign Portfolio Investor (FPI) selling pressure affecting the sector.

FPI Ownership and Market Dynamics

The Indian Banking Sector faces unique challenges due to its high FPI ownership structure. Banking stocks are extensively held by Foreign Portfolio Investors through multiple investment vehicles, including actively managed funds and India-dedicated Exchange Traded Funds (ETFs). This concentrated ownership pattern creates vulnerability to external capital flows.

The heavy FPI presence in banking stocks means that any intensification of foreign selling could create significant downward pressure on share prices across the sector. This correlation between FPI sentiment and banking stock performance has become a key factor for investors to monitor.

Investment Approach and Fundamentals

Despite the potential for FPI-driven volatility, analysts recommend focusing on fundamental analysis rather than reacting purely to short-term price movements. The key consideration for investors should be the underlying financial health and balance sheet strength of banking institutions.

The current banking sector landscape suggests that institutional balance sheets have shown improvement compared to previous periods. This fundamental strengthening provides a foundation for potential returns, even amid external market pressures.

Market Outlook

The 17%+ return projection for select banking stocks reflects analyst confidence in the sector's underlying fundamentals, despite acknowledging the risks posed by FPI selling patterns. Investors are advised to evaluate individual banking stocks based on their financial metrics and operational performance rather than solely responding to market sentiment and price fluctuations.

The banking sector's performance will likely depend on balancing these external pressures with the improved operational metrics and balance sheet quality that many institutions have achieved.