RBI's repo rate cut welcomed by bank leaders, expected to ensure liquidity while monitoring inflation

RBI Governor Sanjay Malhotra

The Reserve Bank of India's (RBI) decision to cut the repo rate by 25 basis points to 6.25 percent has garnered positive feedback from banking leaders across the sector.

Despite a neutral stance due to global market risks, the RBI is expected to ensure liquidity supporting growth while keeping inflation in check, projecting a GDP growth of 6.7 percent and inflation at 4.2 percent for FY26, said Shanti Ekambaram from Kotak Mahindra Bank.

"The RBI decision to start the easing cycle with a 25-bps cut was timely, contextual and also well communicated with respect to regulatory changes in transition to ensure a seamless and non-disruptive manner," said C S Setty, Chairman, State Bank of India (SBI).

The regulatory announcement on forward contract, reviewing trade settling cycle and addressing cyber security in banks and payment systems will ensure better price discovery, more broad basing of participants and ensuring trust in digital banking, he added.

Today's policy announcements will have an impact on the lending sector, primarily through changes in interest rates and liquidity under current economic conditions, said Umesh Revankar, Executive Vice Chairman, Shriram Finance.

"In the Union Budget, the Finance Minister proposed a number of changes aimed at increasing people's purchasing power as disposable incomes rise. The 25-bps reduction in the repo rate will help NBFCs reduce borrowing costs, pass it on to the customers potentially increasing credit demand. As a result of available disposable incomes and lower borrowing costs, the system's liquidity may increase, influencing purchases and leading to an increase in manufacturing activities and overall economic growth," he said.

Given the uncertain global environment, this cut along with the recent tax relief to individuals, should help a rebound in economic activity, said Zarin Daruwala, CEO, India and South Asia, Standard Chartered Bank.

"The MPC’s confidence around moderating inflation augurs well for sustained economic growth. The delay in implementing the revised LCR norms is likely to boost credit delivery and lower lending rates," she added.

Ajay Kumar Srivastava of Indian Overseas Bank noted, the rate cut's potential to boost investment and consumer demand, alongside RBI's measures to enhance digital security like the introduction of the Additional Factor of Authentication and the exclusive 'bank.in' domain.

Binod Kumar from Indian Bank also supported the repo rate cut, and said he sees it as aligning with market expectations and supportive of budget initiatives for increased household expenditure and GDP growth.

However, some banks acknowledged the short-term impact on their profitability, with expectations of eventual recovery; Tamilnadd Mercantile Bank indicated during their recent earnings call that the rate cut might affect their Net Interest Margin (NIM), although they anticipate recovery within three quarters.

Governor Sanjay Malhotra, leading the RBI's Monetary Policy Committee (MPC), announced the repo rate reduction from 6.5 percent to 6.25 percent, while the rates for the Standing Deposit Facility, Marginal Standing Facility, and bank rates remained at 6.5 percent.

The move is in line with a Moneycontrol poll of economists, which had predicted a 25 basis points rate cut.

The RBI increased the repo rate by 250 basis points from May 2022 to February 2023. Since April 2023, the repo rate has been steady at 6.5 percent, in order to keep a check on the inflation rate and bring it to the medium-term target of 4 percent.

RBI Governor said that the MPC noted that inflation has declined. Supported by a favourable outlook on food and continuing transmission of past monetary policy actions, it is expected to further moderate in 2025-26, gradually aligning with the target.

Deputy Governor M. Rajeshwar Rao added, during the press conference, that the transmission of these rate adjustments to deposit rates could take about two quarters.