How will RBI's rate cut impact bank profits and interest rates?

Synopsis

Following the RBI's policy measures, banks are poised to benefit from increased liquidity. This influx allows for strategic deployment into credit or securities, boosting interest income while anticipated deposit rate cuts lower funding costs. Consequently, net interest income and profit margins are expected to improve, with NIM pressure potentially bottoming out by the end of the September quarter.

ET Intelligence Group: The influx of liquidity after the latest monetary policy measures provides banks with a dual advantage. The freed-up funds can be either deployed to meet growing credit demand or invested in government securities and corporate bonds, each of which will support the growth in interest income. Also, armed with the excess liquidity, lenders are expected to cut deposit rates thereby reducing cost of funds.

The combination of rising interest income and declining funding costs is set to enhance net interest income (NII) and net profit. NIM pressure is expected to bottom out by the end of September quarter. Banks with a larger share of fixed-rate loans are likely to benefit more in the current rate-cutting cycle.

"We expect NIMs to be under pressure in the first half of the current fiscal year and start improving from the second half aided by benefits from CRR cut and lower re-pricing of deposits," said Rohan Mandora, associate director at Equirus Securities.

Agencies

The RBI on Friday delivered a higher than expected 50 basis points repo rate cut, along with a 100 basis points reduction in the cash reserve ratio (CRR). The CRR is the share of deposits banks must hold with the RBI. It will decrease to 3% in four tranches of 25 bps each, starting from September 6, October 4, November 1, and November 29 and will release ₹2.5 lakh crore into the banking system. "Margins could now bottom in the second quarter of FY26 for large banks," said Santanu Chakrabarti, analyst at BNP Paribas, adding that earnings growth may be in the teens for most large private banks by the third quarter.

The RBI's measures to improve liquidity has truncated the expected period of NIM compression. Analysts had previously anticipated two separate 25 basis point cuts in June and August, which would have prolonged the pressure on NIMs. With the latest bout of rate cuts, banks are expected to swiftly adjust both deposit and lending rates. Banks have reduced fixed deposit rates by 30-70 bps after the RBI cut the repo rate in February 2025.

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