Mumbai: Fitch Ratings on Thursday said that the higher interest rates can make raising additional private capital more challenging for state-owned banks.

This will make such banks more reliant on equity infusion from the government to maintain market share. Fitch Ratings believes that state-owned banks will lose market share in the next two to three years due to their inability to raise sufficient capital to match the level of loan growth of private banks.

"However, this is unlikely to affect bank ratings, as the process will be gradual and we expect large state banks to remain among the largest in India's banking system over the medium term," Fitch  said in a note.

Fitch Ratings said that higher interest rates can also affect the valuation of securities and can make it difficult for banks, particularly state-owned banks, to raise fresh capital. Thus far in the current financial year, the Reserve Bank of India (RBI)  has raised the policy repo rate by 90 basis points to 4.90 percent. Fitch expects the repo rate to be at 5.90 percent by December and 6.15 percent by end of 2023, then staying at this level through 2024. "This trend should support higher NIM , but the lack of competition for deposits may point to relatively muted demand for new credit," it said.

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