RBI may reduce policy rates by 50 basis points in the first half of 2025: Jefferies
RBI May Cut Policy Rates by 50 Basis Points in 2025
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 decision to ease its liquidity stance and lower the Cash Reserve Ratio (CRR) by 50 basis points during the last Monetary Policy Committee meeting.
The report indicates that the RBI's shift from a "withdrawal" stance to a "neutral" liquidity position, along with the CRR cut to the pre-COVID level of 4% of Net Demand and Time Liabilities (NDTL), has paved the way for a potential rate cut. This reduction is anticipated to stabilize regulatory momentum, supporting growth and investments in the near term.
However, these policy changes might temporarily affect banks' Net Interest Margins (NIMs), with a 10 basis point decline potentially reducing earnings by 3-8%, particularly impacting Public Sector Banks (PSBs). While deposit rates have remained stable, banks' cost of funds has increased by 10-50 basis points over the past year due to repricing and changes in funding mix.
The report also highlights ongoing pressures on asset quality, especially in unsecured retail loans and loans to small and medium enterprises (SMEs). Non-Banking Financial Companies (NBFCs) and smaller private banks serving lower-tier clients have experienced more stress compared to those focusing on upper-tier clients.
Asset quality pressure is expected to ease in FY26, particularly in the unsecured retail loans segment, as provisions for stressed assets are accounted for upfront and new disbursals slow. GDP growth recovery is seen as crucial for easing pressures on SME loans. However, the Microfinance Institution (MFI) segment may continue to face challenges, potentially affecting earnings for mid-sized banks.
Overall, the anticipated rate cuts and easing asset quality pressures in FY26 are expected to benefit the banking sector, although near-term challenges such as NIM compression and MFI stress could impact earnings.
Doubts Revealed
RBI
RBI stands for the Reserve Bank of India. It is the central bank of India, which means it manages the country's money and financial system.
Policy Rates
Policy rates are interest rates set by the RBI to control the supply of money in the economy. They influence how much it costs to borrow money from banks.
Basis Points
A basis point is a unit of measure used in finance to describe the percentage change in interest rates. One basis point is equal to 0.01%.
Jefferies Report
Jefferies is a global investment bank that provides financial advice and services. A Jefferies report is a document they create to share their analysis and predictions about financial markets.
Neutral Liquidity Stance
A neutral liquidity stance means the RBI is neither adding nor removing money from the banking system. It aims to keep the money supply stable.
CRR
CRR stands for Cash Reserve Ratio. It is the percentage of a bank's total deposits that must be kept in reserve with the RBI and not used for lending.
Net Interest Margins
Net Interest Margins are the difference between the interest banks earn from loans and the interest they pay on deposits. It shows how profitable a bank is.
Public Sector Banks
Public Sector Banks are banks owned by the government of India. They provide banking services to the public and are important for the country's economy.
Asset Quality Pressures
Asset quality pressures refer to the challenges banks face when borrowers have trouble repaying loans, which can affect the bank's financial health.
Unsecured Loans
Unsecured loans are loans given without any collateral, meaning the borrower does not have to provide an asset as security. They are riskier for banks.
Microfinance Institutions
Microfinance Institutions are organizations that provide small loans to people who do not have access to traditional banking services, often to help them start small businesses.
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