RBI rate cut: NIM outlook to improve in 2HFY26; check top picks after monetary policy

The Reserve Bank of India (RBI) has announced a reduction in the repo rate by 50 basis points, bringing it down to 5.5%. This move surpasses the general market expectation of a 25 basis points cut, reflecting a bold step by the central bank. Additionally, the RBI has shifted its monetary policy stance from 'Accommodative' to 'Neutral', indicating limited potential for further rate reductions.

In another unexpected measure, the RBI has decided to cut the cash reserve ratio (CRR) by 100 basis points, reducing it to 3% of net demand and time liabilities. This reduction will be implemented in a phased manner, with four equal cuts of 25 basis points each, starting from September 6. The CRR cut is expected to infuse Rs 2.5 lakh crore of additional liquidity into the banking system.

JM Financial has analysed the implications of these monetary policy changes for banks. According to the financial services firm, the cumulative 100 basis points reduction in the repo rate will likely put pressure on banks' net interest margins (NIMs) in the first half of FY26. However, the positive impact of the CRR cuts is anticipated to cushion this effect in the latter half of the fiscal year.

The firm estimates that the 100 basis points cut in the repo rate could lead to a 20-40 basis points reduction in NIMs for banks, depending on their loan and funding mixes. On the other hand, the CRR cut is expected to provide a 7-8 basis points positive impact on NIMs, partially offsetting the negative effects of the repo rate reductions. JM Financial suggests that the CRR cut could mitigate 20%-30% of the total adverse impact on NIMs.

The RBI hinted that it has done its bidding by frontloading rate cuts, while there are non-monetary policy tools for stimulating growth, said Emkay Global Financial Services. "For banks, we believe the cumulative impact of repo-rate cuts will lead to accelerated margin contraction in H1FY26, albeit moderate in H2FY26, benefiting from CRR plus deposit rate cuts," it said.

Emkay believes that the sharp policy rate cut could intensify margin contraction in H1FY26 for banks with higher share of floating rate portfolio, including large PVBs. "On the growth front, we expect some positive rub-off on overall systemic credit growth mainly due to pick up in housing loans, while SMID PVBs are likely to outperform," it said.

Non-banking financial companies (NBFCs) and mid-sized banks with a higher proportion of fixed-rate loans might experience a favourable impact on NIMs, contingent upon the yield trajectory. However, these entities face challenges due to competitive pricing pressures on secured loan segments.

JM Financial has identified several top picks in the financial sector, highlighting Axis Bank, ICICI Bank, State Bank of India, and DCB Bank in the banking sector. In the NBFC and housing finance sector, Shriram Finance, AB Capital, Bajaj Finance, LIC Housing Finance, Aadhar Housing Finance, and Five Star Business Finance are noted as key picks.

"Our preferred picks in the banking space are ICICI Bank, HDFC Bank, RBL Bank, Ujjivan Small Finance Bank, State Bank of India, and Indian Bank, while those in our under-coverage NBFCs are SBI Cards and CreditAccess Grameen," Emkay adds.