Bankers are assessing the potential impact of further rate cuts by the Reserve Bank of India during the rest of the year on their net interest margins, an analysis of banks' earnings commentary shows, as a repo rate reduction lowers the cost of borrowing for banks, leading to a lending rate cut, which may potentially lower interest income on loans.
Loan rates get repriced faster than deposit rates, and as most loans by banks are linked to an external benchmark they get immediately priced in, but deposits rates get adjusted with lag, leading to margin compression.
“In the near term, we will follow by and large what is happening in the banking system and margins will be impacted by the repo rate cuts and we do expect more repo rate to happen,” Sandeep Batra, executive director of ICICI Bank said during the post earnings conference call.
So far, in the first quarter of the financial year 2025-26, banks such as ICICI Bank, HDFC Bank and YES Bank have reported a slight uptick in their margins.
According to the investor presentation, ICICI Bank’s net interest margins stood at 4.41 percent in Q4FY25, as compared to 4.40 percent a year ago. Similarly, YES Bank’s net interest margins have 2.5 percent in March quarter as compared to 2.4 percent in the year ago period.
HDFC Bank is expected to maintain the net interest margins in the range of 3.4-3.5 percent in the coming quarters, the lender said during a post earnings conference call. The bank has been posting net interest margins in the range of 3.4-3.5 percent over the last few quarters.
According to the investor presentation of the HDFC Bank, net interest margins of the bank in January-March quarter stood at 3.5 percent, as compared to 3.4 percent in a quarter ago period and year ago period.
There is a growing consensus among market participants that the RBI will cut more rates in the coming policies, in order to support growth amid a tariff war, with a cooling inflation providing the elbow room for lower rates.
On April 9, the central bank reduced the key repo rate by 25 bps, the second such cut in a row, on a benign inflation outlook and moderate growth. It also shifted its stance from ‘neutral’ to ‘accommodative’.
Bankers also expect the RBI’s monetary policy committee (MPC) to go for another 25 basis points (bps) cut when it meets for its bimonthly review in June 2025.
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