AgenciesRelated
The recent policy actions by the Reserve Bank of India (RBI) appear to mark the end of the current interest rate cutting cycle, according to a report by Union Bank of India.
The report states that the terminal repo rate is now likely to settle at 5.50 per cent, assuming a real interest rate of around 150 basis points and an inflation forecast of 4 per cent for the financial year 2025-26.
It said, "We believe that this stealth easing concludes the rate cutting cycle for now with terminal rate of 5.50 per cent".
The report noted that the RBI's decision to cut policy rates and ease liquidity conditions can be seen as a form of "stealth easing."
The report added that future policy actions will be data-dependent, in line with what RBI Governor Sanjay Malhotra mentioned in his policy statement. The Monetary Policy Committee (MPC) will now assess various factors including inflation trends, global geopolitical uncertainties, and the U.S. Federal Reserve's interest rate trajectory before deciding on any further rate cuts.
The bank pointed out that the rate cuts and liquidity-boosting measures announced by the RBI are likely to aid credit growth, although the impact will take time to reflect in the real economy.
According to the report, a recovery in credit demand could take 2-3 quarters, or even longer, especially if uncertainties in the global environment continue to affect investment sentiment and capital expenditure plans.
In particular, 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 report stated the CRR cut will help improve the money multiplier effect, reduce the cost of funds for banks, and support a rise in net interest margins (NIMs).
Governor Malhotra had noted that 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, which leads to faster repricing of loans linked to external benchmarks.
Overall, the report believed that the frontloaded rate easing, combined with liquidity support measures, will aid growth, though their full effect will be visible only with a time lag.
The report states that the terminal repo rate is now likely to settle at 5.50 per cent, assuming a real interest rate of around 150 basis points and an inflation forecast of 4 per cent for the financial year 2025-26.
It said, "We believe that this stealth easing concludes the rate cutting cycle for now with terminal rate of 5.50 per cent".
The report noted that the RBI's decision to cut policy rates and ease liquidity conditions can be seen as a form of "stealth easing."
The report added that future policy actions will be data-dependent, in line with what RBI Governor Sanjay Malhotra mentioned in his policy statement. The Monetary Policy Committee (MPC) will now assess various factors including inflation trends, global geopolitical uncertainties, and the U.S. Federal Reserve's interest rate trajectory before deciding on any further rate cuts.
The bank pointed out that the rate cuts and liquidity-boosting measures announced by the RBI are likely to aid credit growth, although the impact will take time to reflect in the real economy.
According to the report, a recovery in credit demand could take 2-3 quarters, or even longer, especially if uncertainties in the global environment continue to affect investment sentiment and capital expenditure plans.
In particular, 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 report stated the CRR cut will help improve the money multiplier effect, reduce the cost of funds for banks, and support a rise in net interest margins (NIMs).
Governor Malhotra had noted that 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, which leads to faster repricing of loans linked to external benchmarks.
Overall, the report believed that the frontloaded rate easing, combined with liquidity support measures, will aid growth, though their full effect will be visible only with a time lag.
(Catch all the Business News, Breaking News, Budget 2025 Events and Latest News Updates on The Economic Times.)
Subscribe to The Economic Times Prime and read the ET ePaper online.
Read More News on
(Catch all the Business News, Breaking News, Budget 2025 Events and Latest News Updates on The Economic Times.)
Subscribe to The Economic Times Prime and read the ET ePaper online.
