Mumbai: The Reserve Bank of India's surprise 50 basis points cut in the repo rate is expected to lead to an earlier-than-anticipated bottoming out of net interest margins (NIMs) for banks, potentially paving the way for a quicker earnings recovery, according to analysts.
The unexpected reduction in the cash reserve Ratio (CRR) is also expected to soften the impact on NIMs-by an estimated 7 to 9 basis points (bps)-while aiding faster monetary transmission, thanks to ample liquidity in the financial system.
A basis point is a hundredth of a percentage point.
"This is a major positive for banks versus NBFCs (non-banking financial companies), due to the lower NIM impact on back of the CRR cut and an earlier than expected NIM and earnings bottom resulting in faster earnings reset plus a potential rerating," said Pranav Gundlapalle, India head for financials at Bernstein. "A CRR cut would lead to lower NIM impact of 7-9 bps for the system."
Although the steep rate cut may exert some pressure on bank margins during the September quarter, analysts believe it will ease as the benefits of lower CRR and deposit repricing begin to materialise.
"The steep cut in repo rate is expected to sharply impact the net interest margins of the banks and Q2FY26 is expected to be the weakest," said Sachin Sachdeva, sector head, financial sector ratings, ICRA.
"Thereafter, the pressure on NIMs is expected to decline with the benefit starting to flow in from CRR cut and extent of cut taken by banks on their saving rate deposits while the term deposit rates will reprice downward with a lag."
According to ICRA, the cumulative benefit to margins from these developments could be around 3 to 4 bps in FY26.
The CRR cut of 100 bps to 3% will be implemented in four phases starting from September 6. The move is projected to release ₹2.5 lakh crore of durable liquidity into the banking system and is expected to support medium-term liquidity conditions.
"For large banks, the cumulative 15-20 bps hit on NIM would be followed by a multitude of tailwinds which includes better current account deposit momentum as confidence in money market liquidity and credit availability increases," said Santanu Chakrabarti, analyst, banking and finance, BNP Paribas India.
"We also see better momentum in saving accounts as the term deposit and savings account rate gap reduces, plus the repricing of the term deposit book."
The unexpected reduction in the cash reserve Ratio (CRR) is also expected to soften the impact on NIMs-by an estimated 7 to 9 basis points (bps)-while aiding faster monetary transmission, thanks to ample liquidity in the financial system.
A basis point is a hundredth of a percentage point.
"This is a major positive for banks versus NBFCs (non-banking financial companies), due to the lower NIM impact on back of the CRR cut and an earlier than expected NIM and earnings bottom resulting in faster earnings reset plus a potential rerating," said Pranav Gundlapalle, India head for financials at Bernstein. "A CRR cut would lead to lower NIM impact of 7-9 bps for the system."
Although the steep rate cut may exert some pressure on bank margins during the September quarter, analysts believe it will ease as the benefits of lower CRR and deposit repricing begin to materialise.
"The steep cut in repo rate is expected to sharply impact the net interest margins of the banks and Q2FY26 is expected to be the weakest," said Sachin Sachdeva, sector head, financial sector ratings, ICRA.
"Thereafter, the pressure on NIMs is expected to decline with the benefit starting to flow in from CRR cut and extent of cut taken by banks on their saving rate deposits while the term deposit rates will reprice downward with a lag."
According to ICRA, the cumulative benefit to margins from these developments could be around 3 to 4 bps in FY26.
The CRR cut of 100 bps to 3% will be implemented in four phases starting from September 6. The move is projected to release ₹2.5 lakh crore of durable liquidity into the banking system and is expected to support medium-term liquidity conditions.
"For large banks, the cumulative 15-20 bps hit on NIM would be followed by a multitude of tailwinds which includes better current account deposit momentum as confidence in money market liquidity and credit availability increases," said Santanu Chakrabarti, analyst, banking and finance, BNP Paribas India.
"We also see better momentum in saving accounts as the term deposit and savings account rate gap reduces, plus the repricing of the term deposit book."
