The Reserve Bank's tough stance against the high inflation in India has raised key policy rates quite number of times, which has affected the asset quality of the Indian banks as number of bad loans may go up due to high interest rates.
The recent downgrade by Moody's would mean increase in risk premium, which banks have to pay while raising funds.
The RBI's move to deregulate bank savings rate could impact on Indian bank's profitability further.
Last month, Moody's downgraded the rating of the State Bank of India, India's largest lender by one notch to 'D+' from 'C-' on on account of its low Tier-I capital and worsening asset quality.
Moody's rates 15 commercial banks in India, which together account for about 66% of the banking system's total assets as on March 2011.