Banks Brace for Margin Pressure as RBI Signals More Rate Cuts

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Banks Brace for Margin Pressure as RBI Signals More Rate Cuts

Indian banks are preparing for potential margin compression as the Reserve Bank of India is expected to continue its rate-cutting cycle in the upcoming fiscal year. With inflation cooling and economic conditions favoring lower borrowing costs, financial institutions are assessing the impact of further repo rate reductions on their net interest margins.

Key highlights of the development:
- Lower interest rates could support economic growth but may also reduce banks’ interest income, particularly as loan rates adjust faster than deposit rates.
- Banks such as ICICI Bank, HDFC Bank, and YES Bank have maintained stable margins, though executives acknowledge that continued reductions could pose challenges.
- ICICI Bank reported a net interest margin of 4.41 percent in the fourth quarter of FY25, slightly higher than the previous year, while YES Bank recorded 2.5 percent, up from 2.4 percent a year ago.
- The RBI’s monetary policy committee recently lowered the key repo rate by 25 basis points, marking the second consecutive cut, with analysts anticipating another reduction in June.

Banks are expected to explore alternative revenue streams and cost-cutting measures to mitigate the impact of further rate cuts. Financial analysts predict adjustments in lending strategies and deposit offerings to navigate the evolving interest rate environment.

Sources: Moneycontrol, CNBC-TV18, Economic Times, The Print, BusinessWorld, Fitch Ratings, RBI Monetary Policy Reports