CRR cut by RBI expected to provide support to Net Interest Margins of banks: Report
The Reserve Bank of India’s (RBI) decision to cut the Cash Reserve Ratio (CRR) is expected to provide marginal support to the Net Interest Margins (NIMs) of banks, according to a report by Axis Securities.
The report highlighted that this move would help improve liquidity conditions while also supporting the broader economic growth agenda.
From a banking perspective, the report mentioned that the CRR cut would slightly benefit NIMs. However, the potential for a rate cut in February 2025 could create margin pressures, particularly for banks with a higher share of floating-rate loans. This is because the cost of funds (CoF) for banks would decrease gradually, leading to a lag in rate adjustments.
It said “We believe this would lend slight support to NIMs for banks. Going forward, the RBI will continue to be nimble and proactive in its liquidity management operations to ensure that money market interest rates evolve in an orderly manner and the productive requirements of the economy are met”.
The RBI announced a 50 basis points (bps) cut in CRR in the latest Monetary Policy meeting, reducing it from 4.5 per cent to 4 per cent in two equal phases. This step is projected to release approximately ₹1.16 lakh crore into the banking system, easing liquidity pressures and enabling better alignment with the productive requirements of the economy.
The report noted that the central bank is likely to remain proactive in its liquidity management to ensure money market interest rates remain stable and orderly. The report also pointed to a convergence in credit and deposit growth rates due to a slowdown in credit demand. Asset quality concerns persist, especially for banks with significant exposure to unsecured lending segments, which have faced stress in previous quarters.
Credit costs are expected to remain elevated in the second half of the fiscal year due to these ongoing challenges.
It said “The latest data shows the convergence of credit and deposit growth rates, mainly owing to a slowdown in credit growth”.
The report emphasized the importance of balancing growth and financial stability, with the CRR cut serving as a timely intervention to support the banking sector amid evolving macroeconomic conditions.