RBI Rate and CRR Cuts May Boost Banks Earnings Recovery Say Analysts

The Reserve Bank of India has announced a surprise cut of 50 basis points in the repo rate which analysts believe will accelerate the recovery in bank earnings. This move is expected to lead to a faster bottoming out of net interest margins for banks.

A basis point is one hundredth of a percentage point. Analysts say the cut in the cash reserve ratio is also a major positive for banks compared to non banking financial companies. The lower impact on NIM and the early earnings recovery could help banks see a quicker financial reset.

This is a major positive for banks versus NBFCs due to the lower NIM impact following the CRR cut and earlier than expected earnings bottom said Pranav Gundlapalle India head for financials at Bernstein. He noted that the CRR cut would reduce the NIM impact by around 7 to 9 basis points for the system.

Although the rate cut may pressure bank margins in the second quarter of FY26 analysts expect this to ease once the effects of lower CRR and deposit repricing start to show.

The sharp cut in repo rate is expected to impact bank margins in the short term with Q2FY26 likely to be the weakest said Sachin Sachdeva sector head for financial sector ratings. He added that margin pressure will gradually reduce as CRR benefits and deposit rate adjustments take effect. Term deposit rates are expected to move downward with a lag.

ICRA estimates that the total margin benefit from these measures could be around 3 to 4 basis points in FY26.

The CRR cut of 100 basis points will be implemented in four phases starting from September 6 bringing it down to 3 percent. This move is expected to release approximately 2.5 lakh crore rupees of liquidity into the banking system and support medium term liquidity conditions.

For larger banks while the initial NIM impact could be around 15 to 20 basis points multiple positive factors are expected to follow said Santanu Chakrabarti analyst for banking and finance at BNP Paribas India. These include stronger current account deposit growth better savings account momentum and term deposit repricing as the rate gap narrows.

Overall the RBI measures are likely to improve liquidity support deposit growth and contribute to a faster and more stable recovery in bank earnings.