RBI's Rs 2.5 lakh crore masterstroke! Why bank stocks are smiling despite NIM pain

Time of India

15 hours ago

While RBI's jumbo 50 basis point rate cut was good news for not just those paying home loan EMIs but also all other borrowers, it raised immediate concerns over pressure on
net interest margins
(NIM) of banks. But Governor
Sanjay Malhotra
's Rs 2.5 lakh crore helpline of a 100 bps cut in the Cash Reserve Ratio (CRR) turned the tide for lenders.
Nifty Bank surged 1.5%, hitting a new record, with IDFC First Bank,
Axis Bank
, and
AU Small Finance Bank
rallying up to 5.5%. Among heavyweights,
HDFC Bank
rose 2%, while
SBI
added around 1%. NBFCs outperformed, with Cholamandalam Finance,
Shriram Finance
, and
Bajaj Finance
up 4-5%, as falling rates tend to benefit non-bank lenders more.
'The big rate cut will impact bank margins in the near term. However, the credit growth that this rate cut will hopefully stimulate will compensate for the dip in margins,' said Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments.
The RBI's move to reduce CRR by 100 bps over four tranches starting September 6, 2025, is expected to inject Rs 2.5 lakh crore into the banking system. Analysts say this will significantly improve system liquidity and offset the NIM squeeze caused by falling lending rates.
'This move is likely to enhance liquidity in the system, making borrowing cheaper and encouraging companies to pursue capital expenditure,' said Divam Sharma, Founder of Green Portfolio PMS. 'With FPI inflows slowing down, this infusion of liquidity is a timely and welcome move.'
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The CRR cut, by lowering the required reserves banks must hold, will improve banks' lending capacity, ease funding costs, and ultimately support credit growth, just when consumption and capex demand are poised to recover.
'By lowering both the price (repo) and quantity (CRR) of money, the RBI has flattened the transmission curve,' said Arsh Mogre, Economist at PL Capital. 'The CRR cut in particular offsets short-term pressures on bank margins from lower rates.'
At a time when monetary transmission has often been patchy, experts say this combo-move—a rate cut plus liquidity easing—could finally push banks to pass on the benefits more effectively.
'The rate cut's impact hinges critically on how effectively banks and financial institutions pass them on to end borrowers,' said Dr. Bharath Supra, Associate Professor – Finance at SBM, Navi Mumbai. 'Without stronger transmission mechanisms, the RBI's monetary easing may not translate into actual credit growth or consumer spending.'
RBI's decision to front-load rate cuts, while switching to a neutral stance, indicates caution. But many experts see room for at least one more cut—if inflation remains under control.
'If inflation stays below 4% in H2FY26 and transmission visibly improves, there is still scope for another 25 bps cut before year-end,' added Mogre.
'This is not business-as-usual monetary policy,' Mogre emphasized. 'It's a deliberate realignment based on a rare convergence: falling inflation, stable external accounts, and the need to pre-empt global slowdown spillovers.'
From a sectoral perspective, the banking sector looks well-positioned to benefit in the medium term despite short-term pressures.
'Tailwinds for NIMs from improving systemic liquidity and deposit rate cuts are visible,' said Naveen Kulkarni, CIO at Axis Securities PMS.
However, he said, even as H1FY26 will see a more pronounced impact of the rate cut on NIMs, some respite is expected over H2FY26.
'Asset quality concern appears to be steadily waning with unsecured segment stress showing gradual signs of stability, while the secured segment asset quality continues to hold up well. At present, we would prefer banks with promising growth prospects, healthy deposit franchises, stable asset quality metrics and strong and steady management teams. We continue to prefer the larger private banks and our picks would be HDFC Bank,
ICICI Bank
and
Kotak Bank
amongst the larger private banks and
City Union Bank
amongst the mid-sized banks'.