NEW DELHI: The RBI’s reduction in Cash Reserve Ratio (CRR) is expected to offer modest support to banks’ Net Interest Margins (NIMs), according to a report by Axis Securities.
The assessment mentioned that the decision will enhance liquidity while supporting broader economic development objectives.
The report also indicates that while the CRR reduction would modestly benefit NIMs, potential rate cut in February 2025 might create pressure on margins, especially for institutions with substantial floating-rate loan portfolios. This is primarily because banks’ cost of funds (CoF) would reduce gradually, causing delays in rate modifications.
“We believe this would lend slight support to NIMs for banks. Going forward, the RBI will continue to be nimble and proactive in its liquidity management operations to ensure that money market interest rates evolve in an orderly manner and the productive requirements of the economy are met,” the report stated.
The central bank, in its recent Monetary Policy meeting, implemented a 50 bps reduction in CRR, lowering it from 4.5 per cent to 4 per cent through two equal instalments.
This will inject Rs 1.16 lakh crore into the banking system, reducing liquidity constraints and facilitating better economic resource allocation.
Additionally, the report indicates that the central bank intends to maintain an active approach to liquidity management to ensure stability in money market interest rates.
The report also mentions the alignment of credit and deposit growth rates, attributed to decreased credit demand. Quality of assets remains a concern, particularly for institutions with significant unsecured lending exposure, which experienced difficulties in previous quarters. Higher credit costs are anticipated in the fiscal year’s latter half due to these ongoing issues.
It underscores the significance of maintaining equilibrium between growth and financial stability, with the CRR reduction representing a strategic intervention to bolster the banking sector amidst changing economic conditions.
