RBI may reduce policy rates by 50 basis points in the first half of 2025: Jefferies

This after the central bank eased its stance on liquidity and reduced the Cash Reserve Ratio (CRR) by 50 bps during the last MPC meeting.

Jefferies report says "After easing stance on liquidity & CRR by 50bps, RBI may review policy rates; we see 50bps rate cuts in 1H25".

The report highlighted that the RBI's shift from a "withdrawal" stance to a more "neutral" liquidity position, coupled with the CRR cut to the pre-COVID level of 4 per cent of Net Demand and Time Liabilities (NDTL), has set the stage for a potential rate cut.

This reduction in policy rates is expected to stabilize the regulatory momentum, which may be supportive of growth and investments in the near term.

However, the report noted that these policy changes could temporarily impact banks' Net Interest Margins (NIMs). A 10 bps decline in NIM could reduce earnings by 3-8 per cent, with the impact being more pronounced for Public Sector Banks (PSBs).

While deposit rates have remained largely stable, banks' cost of funds has risen by 10-50 bps over the past year due to repricing and changes in funding mix.

The report also highlighted the ongoing pressures on asset quality, particularly in unsecured retail loans and loans to small and medium enterprises (SMEs). Non-Banking Financial Companies (NBFCs) and smaller private banks catering to lower-tier clients have faced greater stress compared to lenders focused on upper-tier clients.

It said "Asset quality pressure may ease in FY26. There has been a divergent rise in asset quality pressure, especially from unsecured loans and lenders with focus on upper-tier clients have faced lower pressure than NBFCs & smaller private banks that focus on lower tier clients".

The report expects asset quality pressures to ease in FY26, especially in the unsecured retail loans segment. This improvement could occur as provisions for stressed assets are accounted for upfront and new disbursals slow. GDP growth recovery is seen as a critical factor for easing pressures on SME loans.

However, the Microfinance Institution (MFI) segment may continue to face challenges, potentially dragging down earnings for mid-sized banks.

Overall, the anticipated rate cuts and easing asset quality pressures in FY26 are expected to provide tailwinds for the banking sector, although near-term challenges such as NIM compression and MFI stress could weigh on earnings. (ANI)