RBI’s Liquidity Boost To Push Banks To Pass-on 100 bps Rate Cuts In 2025: Fitch

New Delhi, Jul 16 (KNN) Global rating agency Fitch Ratings stated on Wednesday that the Reserve Bank of India's substantial liquidity infusions into the banking system since early 2025, combined with its commitment to maintain adequate liquidity, will support the transmission of 100 basis points in rate cuts during 2025.

The RBI has injected approximately Rs 5.6 lakh crore, equivalent to 2 percent of system assets, through government securities purchases in 2025.

This durable funding injection has resulted in surplus system liquidity since March, according to Fitch's analysis.

The central bank's decision to reduce the cash reserve ratio by 100 basis points will release an additional Rs 2.7 lakh crore in liquidity through a phased implementation approach.

Fitch noted that these substantial liquidity infusions since January 2025, along with the RBI's commitment to provide sufficient liquidity going forward, have significantly improved funding conditions across the banking system.

The improved funding environment is reflected in rising liquidity surpluses and declining deposit costs. Fitch expects these accommodating funding conditions to continue and facilitate the transmission of 100 basis points in rate cuts throughout 2025.

The rating agency also highlighted that a reversal in the banking sector's loan-to-deposit ratio amid slower loan growth should reduce competitive pressure on banks for deposits.

The RBI has implemented a total of 100 basis points in policy rate cuts during 2025, beginning with a 25 basis point reduction in February, marking the first rate cut since May 2020.

This was followed by another 25 basis point cut in April and a larger-than-expected 50 basis point reduction in June.

Fitch characterized these measures as representing a significant shift in the RBI's liquidity stance since its October 2024 assessment.

The central bank's approach aims to stimulate loan growth while avoiding intensification of funding cost pressures on the banking sector.

The surplus liquidity conditions are expected to accelerate the decline in fresh deposit costs. However, Fitch projects a 30 basis point contraction in banking margins for the financial year ending March 2026.

The rating agency anticipates that margin pressures will moderate in FY27 as deposit costs decrease, supported by lower CRR requirements.

In its June monetary policy review, the RBI announced a substantial 1 percent reduction in the cash reserve ratio, bringing it down to 3 percent.

This reduction will be implemented in four equal tranches of 25 basis points each, taking effect from the fortnights beginning September 6, October 4, November 1, and November 29, 2025.

The CRR reduction means commercial banks will be required to maintain only 3 percent of their deposits in liquid cash form with the RBI, thereby freeing up additional funds for lending activities.

(KNN Bureau)