RBI turns dovish: What the next few quarters hold for banks and NBFCs

Vinod Nair, head of research at Geojit Financial Services, said this should reflect quickly in earnings. “The increase in treasury and liquidity support this month will help treasury income for banks in Q3. Maybe the contraction in NIMs will continue for the next quarter to March, but some support is likely from treasury income,” he said.

But the bigger story and the key metric to track is net interest margins (NIMs).

Banks are still absorbing the impact of the RBI’s earlier 100-bps rate cuts between February and June. Lending rates fell sharply, but deposit costs did not fall at the same pace. As a result, sector NIMs dropped over 20 basis points in the September quarter — and analysts expect this trend to extend for a bit longer.

“We expect margin pain for banks to be felt throughout Q4FY26. Expect 20–30 bps margin squeeze cumulatively in the upcoming two quarters. Beyond that, the margin pressure should subside,” said Chokkalingam G, founder of Equinomics Research.

Market expert Sunil Subramaniam believes the worst may soon be over. He noted that banks have already cut term deposit rates by about 105 bps, slightly more than the RBI’s own 100-bps reduction. This should gradually reduce funding costs. Meanwhile, credit growth has strengthened, helped by festive-season spending and EMI-driven purchases — a trend that could help stabilise margins.

Another key element to track is liquidity, with the RBI announcing a Rs 1 lakh crore OMO purchase in December and a planned $5 billion long-term FX swap. These moves should ease funding stress during periods like advance tax outflows and help interest-rate transmission through the system.

Why NBFCs benefit faster

NBFCs, unlike banks, feel the positive impact of rate cuts much sooner. Their borrowing costs depend heavily on market rates and bank lines of credit, both of which react quickly when the RBI eases policy.

This means a direct and early reduction in their cost of funds, which expands their spreads and profitability. Retail-focused NBFCs in segments like personal loans, gold loans, vehicle finance, affordable housing and microfinance are positioned to see the quickest gains.

Vijay Gour, Research Analyst at Mirae Asset–Sharekhan, said the current easing cycle plays strongly in favour of NBFCs. Lower borrowing costs will “improve funding conditions and profitability”, he said, adding that NBFCs will be “among the first to pass on benefits to borrowers,” supporting loan demand across categories.

For NBFCs, the two key metrics investors should track are cost of funds, which should decline over the next couple of quarters, and loan growth, which typically picks up when borrowers see cheap EMIs.

With the RBI cutting rates by 125 bps this year and infusing massive liquidity into the system, the cycle has decisively turned towards easing. Banks are likely to weather a few more quarters of margin compression as deposit rates adjust slowly, but NBFCs are set to show quicker earnings improvement thanks to cheaper funding and faster transmission.

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