The Reserve Bank of India’s (RBI) recent policy actions, as reported by Union Bank of India, suggest that the current interest rate cutting cycle has come to an end. The terminal repo rate is expected to settle at 5.50%, assuming a real interest rate of 150 basis points and an inflation forecast of 4% for the financial year 2025-26. This “stealth easing” by the RBI, which includes cutting policy rates and easing liquidity conditions, aims to support credit growth and aid the economy.
However, the report notes that the impact of these measures will take time to reflect in the real economy, and a recovery in credit demand may take 2-3 quarters or even longer. The global environment and uncertainties in investment sentiment and capital expenditure plans may also affect the timing of this recovery. The 100 basis point cut in the Cash Reserve Ratio (CRR), to be implemented in four tranches, is expected to play a key role in improving the transmission of monetary policy.
The CRR cut is expected to improve the money multiplier effect, reduce the cost of funds for banks, and support a rise in net interest margins (NIMs). According to RBI Governor Sanjay Malhotra, the CRR cut could boost banking system NIMs by around 7 basis points, helping banks absorb some of the pressure caused by the 50 basis point repo rate cut. This, in turn, will lead to faster repricing of loans linked to external benchmarks.
The report concludes that the frontloaded rate easing, combined with liquidity support measures, will aid growth, although their full effect will be visible only with a time lag. Future policy actions will be data-dependent, taking into account factors such as inflation trends, global geopolitical uncertainties, and the US Federal Reserve’s interest rate trajectory. The Monetary Policy Committee (MPC) will assess these factors before deciding on any further rate cuts. Overall, the RBI’s policy actions are expected to support the economy, but the timing and extent of the impact will depend on various factors.