NEW DELHI (Economy India): Nomura has projected that a potential cut in RBI’s repo rates could have a greater impact on large private banks compared to mid-sized or small banks. This is primarily due to the fact that large banks have a significant portion of their loan portfolios linked directly to the repo rate and other external benchmarks.
Current RBI Stance In its August meeting, the Reserve Bank of India (RBI) maintained the repo rate at 6.5%. Retail inflation in India fell to 3.54% in July, marking a five-year low and coming in below the RBI’s 4% target.
Effect on Large Banks Nomura’s analysis suggests that a 50 basis points cut in the repo rate could affect large banks’ net interest margins (NIM) by 15-20 basis points. This is due to the high proportion of large banks’ loans being linked to the repo rate. “Large private banks, with 50-60% of their loan books linked to external benchmarks, will experience a more pronounced impact on their interest margins compared to smaller banks,” the report states.
Impact on Smaller Banks Smaller banks such as IndusInd Bank, AU Small Finance Bank, and Bandhan Bank, which have a larger share of fixed-rate loans, are expected to be less affected. The State Bank of India (SBI), with a substantial portion of MCLR-linked loans, will see a relatively minor impact of about 12 basis points.
Further Implications Nomura also highlighted that a 50 basis points cut in the Cash Reserve Ratio (CRR) could lead to a 3-5 basis points increase in NIMs. However, this potential benefit may be offset by new liquidity regulations set to take effect in April next year.
Deposit Growth Expectations The report indicates that deposit growth, which has been sluggish due to reduced profitability, is expected to improve with a rate cut. Nomura’s top picks include Kotak Mahindra Bank, ICICI Bank, SBI, and Federal Bank. The report notes that a 1 percentage point increase in CASA (Current and Savings Accounts) ratio could boost NIMs by 4-5 basis points.
Revised Target Prices Nomura has adjusted its target prices for Axis Bank, SBI, and Bank of Baroda, but has maintained its BUY rating for these banks.
(Economy India)
