RBI Monetary Policy: Paving Way for Further Rate Cuts by Axis Securities Ltd
The RBI’s decision to cut rates by another 25bps was largely on the expected lines. The regulator has also changed its stance from Neutral to “Accommodative”. This paves the way for further rate cuts in the upcoming meetings. Inflation is cooling off, supported by a sharper-than-expected decline in food inflation, a positive outlook, and greater confidence in aligning the headline inflation with the 4% target over a 12-month horizon. Consequently, the RBI has revised its inflation forecast for FY26 downwards to 4% vs 4.2% earlier. However, amidst global challenges, the GDP growth rate has also been tweaked downwards to 6.5% from 6.7% earlier.
The credit growth momentum for banks has evidently slowed down primarily owing to a cautious approach by banks towards lending amidst asset quality concerns in the unsecured segment, softening demand, and private banks intending to tame their LDR to a balanced level. It also cannot be denied that the competitive intensity amongst banks for deposits has not reduced. During the rate-easing cycle, a general trend observed is an improvement in CASA ratios for banks. This has not been the case in Q4, with deposit growth being led by both CASA and TDs based on the provisional updates released by banks thus far.
Systemic liquidity was in deficit for the majority of the quarter, though it eased into surplus as banks exited Q4FY25. The RBI remains committed to providing sufficient system liquidity and will continue to monitor the evolving liquidity and financial market conditions, and proactively take appropriate measures to ensure adequate liquidity.
We expect the transmission on the CoF side to be slower than the pace of transmission on the yields. In terms of margins for banks, we expect the full impact of the rate cut to reflect from Q1FY26, with a partial impact being visible in Q4. We believe better-rated NBFCs would benefit not only from the rate cuts but also the RBI’s decision to roll back the higher risk-weight on bank loans to NBFCs. Amongst banks, we favour large private banks at the current juncture.
*Stock Picks:
Banks – HDFC Bank, Kotak Mahindra Bank, ICICI Bank, and AU Small Finance Bank
NBFCs – Shriram Finance, Cholamandalam Inv & Finance, Bajaj Finance and SBI Cards
Above views are of the author and not of the website kindly read disclaimer
