RBI rate cut: There are conditions tied to banks' lifeline

The financial sector is in a frenzy over the Reserve Bank of India's (RBI) unexpected decision to reduce the repo rate by 50 basis points to 5.5% and the cash reserve requirement (CRR) by 100 basis points to 3%, releasing Rs 2.5 lakh crores in lendable funds. The majority agree that it is a strategic attempt to drive GDP growth near 7-8 percent, although this isn't a definite victory for banks, NBFCs, and investors. A deeper look at the fine print is necessary. First of all, the CRR cut is a blessing for banks. Lenders have a sizable war fund to expand credit after freeing up Rs 2.5 lakh crore, or about 3% of the banking system's net demand and time liabilities. Nomura's projections are even more optimistic, predicting a 3–12 basis point increase in net interest margins (NIMs), a 2–9 basis point increase in return on assets (RoA), and a 2–8% increase in profits per share (EPS) for covered banks. Jefferies sets the margin boost at 7 basis points. For large banks like Axis and HDFC Bank, who face restrictions on deposit growth, as well as mid-sized firms like IndusInd Bank, AU Small Finance Bank, and Federal Bank, this is especially encouraging. Lending rates have already been reduced by banks such as Bank of Baroda, Punjab National Bank, Canara Bank, and ICICI Bank. Baroda, for example, reduced its repo-linked rate from 8.65 percent to 8.15 percent. The savings are noticeable for current borrowers with repo-linked loans, such as those for housing, vehicle, or MSME credit. The Reserve Bank of India (RBI) made a significant move by reducing the repo rate by 50 basis points to 5.5% and cutting the cash reserve ratio (CRR) by 100 basis points to 3%, releasing ₹2.5 lakh crore in funds available for lending. This decision is seen as a strategic effort to boost GDP growth, aiming for a target of 7-8%, and to provide relief to the financial sector. The reduction in the CRR is particularly beneficial for banks, as it creates additional liquidity that can be used to expand credit. The move has been welcomed by the banking sector, which now has a significant amount of funds at its disposal to support lending and economic activity. For large banks like Axis and HDFC Bank, which face restrictions on deposit growth, and mid-sized banks like IndusInd Bank and AU Small Finance Bank, the cut offers an opportunity to grow their loan portfolios. According to projections by analysts, this policy shift is expected to result in an increase in net interest margins (NIMs), return on assets (RoA), and earnings per share (EPS) for the covered banks. Specifically, Nomura projects a 3–12 basis point increase in NIMs and a 2–9 basis point rise in RoA, which would lead to improved profitability for these institutions. The impact of these changes has already been felt in the lending rates, with several banks, including Bank of Baroda, Punjab National Bank, and ICICI Bank, reducing their repo-linked rates. For instance, Bank of Baroda lowered its rate from 8.65% to 8.15%, which will provide noticeable savings for borrowers with repo-linked loans, such as those for housing, vehicles, or MSMEs. This reduction is expected to help current borrowers who have repo-linked loans by decreasing their monthly repayments. While the RBI's move has been met with optimism in the banking sector, especially with the boost in liquidity, the real challenge lies in how efficiently these funds are used to stimulate economic growth. If banks effectively deploy the additional liquidity into credit growth, it could significantly impact economic recovery. However, analysts remain cautious, pointing out that the true effectiveness of these policy changes will depend on the broader economic environment and the banks’ ability to translate the increased liquidity into meaningful loans for businesses and consumers.