NEW DELHI: The Reserve Bank of India (RBI) is expected to lower policy rates by 50 basis points (bps) in the first half of 2025, according to a report by Jefferies.
This follows the central bank’s recent shift towards eased liquidity, and a 50 bps reduction in the
cash reserve ratio
(CRR) during the last
Monetary Policy Committee
(MPC) meeting.
The report quoted by news agency ANI noted, “After easing stance on liquidity & CRR by 50bps, RBI may review policy rates; we see 50bps rate cuts in 1H25”.
The report emphasised that as RBI transitions from a “withdrawal” stance to a neutral liquidity position along with lowered CRR to its pre-Covid level of 4 per cent of net demand and time liabilities (NDTL), the central bank appears to be paving the way for rate cuts aimed at supporting growth and investments.
Impact on banks and asset quality
While a reduction in policy rates is expected to stabilise regulatory momentum and bolster economic growth, it may also have short-term implications for banks’ earnings. The report cautions that a 10 bps decline in net interest margins (NIMs) could reduce earnings by 3–8 per cent, with public sector banks likely to feel the brunt.
Deposit rates have remained stable, but banks’ cost of funds has risen by 10–50 bps over the past year due to repricing and shifts in funding mixes. Additionally, pressures on asset quality persist, particularly in unsecured retail loans and loans to small and medium enterprises (SMEs).
The report said, “Asset quality pressure may ease in FY26. There has been a divergent rise in
asset quality pressure
, especially from unsecured loans and lenders with focus on upper-tier clients have faced lower pressure than NBFCs & smaller private banks that focus on lower tier clients.”
However, the report predicts these asset quality pressures will ease by FY26, as stressed assets are taken into account for upfront and new disbursals slow. GDP growth recovery is expected to play a crucial role in easing SME loan pressures.
The report warns that the Microfinance Institution (MFI) segment may continue to struggle, potentially dragging down the earnings of mid-sized banks.
Outlook
The anticipated rate cuts and improved asset quality by FY26 are expected to act as tailwinds for the banking industry. However, near-term challenges such as NIM compression and stress in the MFI segment could weigh on earnings, particularly for public sector and mid-sized banks.
