Banks Brace for Margin Pressures on Expected RBI Rate Cuts in FY26

Growing Consensus on Accommodative Stance as Cooling Inflation Opens Monetary Space

Indian banks are increasingly preparing for the likelihood of further repo rate cuts by the Reserve Bank of India (RBI) through the remainder of FY2025-26, a development that could significantly compress net interest margins (NIMs). This evolving monetary landscape is being shaped by cooling inflation trends, ongoing global trade tensions, and a broader policy pivot toward supporting economic growth.

Bankers and market participants are aligning their forecasts with the RBI’s dovish undertone. The central bank’s shift in policy stance from ‘neutral’ to ‘accommodative’ in its April 9 monetary policy review—coupled with a 25 basis point repo rate cut, the second in a row—has strengthened the belief that the central bank may pursue further easing in its upcoming bimonthly reviews.

Highlights:

• RBI cut repo rate by 25 bps on April 9; stance shifted to ‘accommodative’

• Market expects another 25 bps cut in June policy review

• Cooling inflation and global trade concerns are prompting a growth-supportive monetary policy

• Banks face risk of margin compression due to faster loan repricing compared to deposits

Banks Begin Assessing Margin Risks as Loan Repricing Accelerates

At the core of the concern lies the structural mismatch in interest rate transmission. While banks’ borrowing costs fall immediately following a cut in the repo rate, their loan portfolios—most of which are linked to external benchmarks—reprice almost instantly. In contrast, deposit rates adjust with a lag, leading to temporary but potentially significant compression in net interest margins.

Executives across major banks are voicing caution in their earnings commentary. Sandeep Batra, Executive Director at ICICI Bank, noted during the bank’s post-earnings call that while the bank will follow the systemic pricing behaviour, margin pressure due to rate cuts is likely. “We do expect more repo rate cuts to happen,” he added, underscoring growing industry-wide expectations.

Highlights:

• External benchmark-linked loans reprice faster than deposits

• Temporary dislocation between lending and deposit rates may compress NIMs

• ICICI Bank flags likelihood of further rate cuts impacting short-term margins

Mixed NIM Trends in Q4FY25, But Caution Persists for Coming Quarters

Despite the macro-level concerns, Q4FY25 earnings across top lenders showed stable to marginally improved NIMs, reflecting a lagged impact of previous rate cuts and robust credit growth.

ICICI Bank reported a net interest margin of 4.41% in Q4FY25, compared to 4.40% in the year-ago quarter, according to its investor presentation. YES Bank’s net interest margin rose slightly to 2.5% from 2.4% year-on-year. Meanwhile, HDFC Bank, which has maintained consistent margins over past quarters, reported a stable NIM of 3.5% in Q4FY25, an improvement from 3.4% in Q3FY25.

During its earnings call, HDFC Bank reaffirmed its target to maintain NIMs in the 3.4%–3.5% range for the next few quarters. However, the bank acknowledged potential downward pressure depending on the pace and extent of future rate cuts by the RBI.

Highlights:

• ICICI Bank Q4FY25 NIM: 4.41% vs 4.40% YoY

• YES Bank Q4FY25 NIM: 2.5% vs 2.4% YoY

• HDFC Bank Q4FY25 NIM: 3.5%, with guidance in the 3.4%-3.5% range

• Margins so far resilient but may weaken with future rate actions

Policy Outlook: RBI’s Accommodative Bias Could Challenge Banks’ Profitability

The RBI’s inclination to adopt a more accommodative monetary stance stems from moderate growth data and an improving inflation profile, providing room for policy easing. With core inflation stabilising below target levels, the central bank is expected to focus on cushioning the economy against external trade shocks, including emerging tariff frictions.

Economists anticipate that the Monetary Policy Committee (MPC) may opt for another 25 bps repo rate reduction in its June 2025 review, a move that would bring the policy rate closer to pre-2022 levels. If executed, this would further push banks to recalibrate their asset-liability pricing strategies to safeguard profitability.

While credit growth and robust asset quality metrics continue to offer fundamental strength, the duration mismatch between assets and liabilities presents a short- to medium-term risk for bank earnings.

Highlights:

• RBI likely to cut rates again in June amid benign inflation

• External shocks like trade disputes influencing dovish bias

• Banks may revise rate transmission and balance sheet strategy to mitigate margin risks