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RBI Monetary Policy: Rates Cut by 25bps After a 24-Month Hiatus

The RBI finally reversed the interest rate cycle by announcing a 25bps rate cut after holding rates steady for a couple of years. This was largely anticipated after the liquidity-boosting measures announced in late Jan’25. GDP growth for FY25 has been revised downwards to 6.4% vs. 6.6% previously. For FY26, GDP growth is expected to hold up at 6.7%. Inflation estimates for FY26 are expected to be closer to the regulator’s tolerance limit. We could expect another rate cut of 25bps in the upcoming meetings.

The credit growth momentum for banks has evidently slowed down either owing to a cautious approach by banks towards lending amidst asset quality concerns in the unsecured segment or softening demand. However, the recent budget announcements show positive levers for supporting credit growth revival. The budget announcements offer a fillip to rural and urban consumption through tax rate tweaks and should support retail credit. Similarly, continued thrust on infrastructure, development, and resumption of economic growth should support credit growth. However, we would closely monitor the deposit mobilisation to support this credit growth while maintaining a balanced LDR. The systemic LDR at the end of Jan’25 stood at ~81%.

The rate cut can be viewed as a positive for lenders who have a higher share of fixed rate portfolios, especially credit card issuers, vehicle financiers, and gold financiers. On the other hand, banks with a higher share of floating-rate loans would continue to face near-term headwinds on margins. However, we would remain watchful of asset quality trends for banks, especially those with meaningful exposure to unsecured lending, wherein recovery is still a couple of quarters away

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Key Policy Announcement

* The Governor indicated that the regulator will continue to strengthen, rationalise and refine the prudential and conduct-related regulatory framework in the overall interest of the economy - especially in the context of some of the proposed regulatory changes pertaining to liquidity coverage ratio (LCR), expected credit loss (ECL) framework for provisioning by banks, and the prudential norms governing projects under implementation. He also added that the regulator will ensure that the implementation of such regulations is smooth. RBI will give sufficient time for transition, and where regulations have major implications, the implementation will be phased.

* The RBI remains committed to providing sufficient system liquidity and has taken several steps in this regard. The regulator will continue to monitor the evolving liquidity and financial market conditions and proactively take appropriate measures to ensure orderly liquidity conditions.

* Emphasis on Digital Security: The rapid digitalisation of financial services has brought convenience and efficiency but has also increased exposure to cyber threats and digital risks. The surge in digital fraud is a matter of concern, warranting action. The Reserve Bank has been taking various measures to enhance digital security in the banking and payments system. Introducing an Additional Factor of Authentication (AFA) for domestic digital payments is one such measure. It is proposed that AFA be extended to online international digital payments made to offshore merchants, who are enabled for such authentication.

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