The Reserve Bank of India (RBI) is expected to reduce policy rates by 50 basis points in the first half of 2025, according to a report by Jefferies. This follows the central bank's shift to a neutral liquidity stance and its recent reduction of the Cash Reserve Ratio (CRR) by 50 bps during the last Monetary Policy Committee meeting.
The report notes that the CRR cut, bringing it to the pre-COVID level of 4% of Net Demand and Time Liabilities (NDTL), along with a change in liquidity stance, sets the stage for a potential rate cut in the coming months. "After easing stance on liquidity & CRR by 50bps, RBI may review policy rates; we see 50bps rate cuts in 1H25," Jefferies report stated.
This reduction in policy rates is expected to stabilize the regulatory momentum, which may be supportive of growth and investments in the near term. However, the report noted that these policy changes could temporarily impact banks' Net Interest Margins (NIMs). A 10 bps decline in NIM could reduce earnings by 3-8 per cent, with the impact being more pronounced for Public Sector Banks (PSBs).
While deposit rates have remained largely stable, banks' cost of funds has risen by 10-50 bps over the past year due to repricing and changes in funding mix. The report also highlighted the ongoing pressures on asset quality, particularly in unsecured retail loans and loans to small and medium enterprises (SMEs). Non-Banking Financial Companies (NBFCs) and smaller private banks catering to lower-tier clients have faced greater stress compared to lenders focused on upper-tier clients.
The report expects asset quality pressures to ease in FY26, especially in the unsecured retail loans segment. This improvement could occur as provisions for stressed assets are accounted for upfront and new disbursals slow. GDP growth recovery is seen as a critical factor for easing pressures on SME loans. However, the Microfinance Institution (MFI) segment may continue to face challenges, potentially dragging down earnings for mid-sized banks.
(With ANI inputs)
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