ANALYSIS Can banks absorb a rate cut in December?

As expectations build for another rate cut by the Reserve Bank of India (RBI) in the December monetary policy, banks may come under renewed pressure, with their net interest margins (NIMs), which were earlier projected to stabilise in the third quarter, now likely to face a fresh squeeze.

However, the potential impact is anticipated to remain contained for the sector, supported by the substantial decline in rates on deposits observed thus far, experts said.

“Margins appear to have bottomed out and are projected to exhibit slight improvement in H2 FY2026. Nonetheless, any additional policy rate reduction by the RBI could defer this recovery and lead to a marginal contraction in NIMs over the subsequent quarters,” said Sachin Sachdeva, Vice President, Sector Head - Financial Sector Ratings, ICRA.

Typically, when a rate-cut cycle begins, banks see margin pressure as lending rates, especially those linked to the repo rate adjust downward more quickly than deposit rates. This faster transmission on the lending side compresses NIMs for banks.

According to the Ace Equity data, state-owned lenders have seen a 6-60 basis points (bps) reduction in NIMs between Q4FY25 and Q2FY26. Similarly, private banks have seen a reduction in NIMs of 6-41 bps, and small finance banks by 10-8- bps.

During their second-quarter earnings announcements and press conferences, several bankers had expressed confidence that NIMs would stabilise in the third quarter of the current financial year. This optimism was largely based on the earlier assumption that there would be no immediate rate cut by the RBI.

CS Setty, Chairman of India's largest bank, State Bank of India, said he doesn't expect a rate cut in December. “Our optimism also stems from the fact that our house view is that we may not have the rate cut till March. The bank aims to maintain it above 3 percent and the lender will stick to it.”

“I had indicated that Q3 and Q4 onwards, definitely, there will be some good movement happening on the NIM and NII fronts,” said Ashok Chandra, managing director and chief executive officer of Punjab National Bank, during a post Q2FY26 earnings analyst call.

Echoing a similar view, Rajneesh Karnatak, managing director and chief executive officer of Bank of India, noted that margins should begin improving from the fourth quarter onwards, once the repricing of liabilities, particularly term deposits, is completed.

However, with inflation easing faster than expected, the base case for a repo rate reduction by the RBI has strengthened. This shift provides the central bank with room to support economic growth in the near term, but it could delay the anticipated recovery in banks’ NIMs.

On November 10, Monecyontrol had reported that the hope for a rate cut ignited as India’s retail inflation is likely to dip further in October and may remain below the RBI's lower tolerance threshold for a second consecutive month.

Economists, however, believe that the Monetary Policy Committee (MPC) will act cautiously on the key policy rate, and take its cue from growth data rather than give more weightage to inflation.

If a rate cut were to happen in December, it will be the first reduction by the central bank’s status quo in last two policies. The RBI has so far reduced repo rate by 100 bps from 6.50 percent to 5.50 percent.