A report by the Federal Bank of India shows that recent policy measures by the Reserve Bank of India (RBI) are likely to mark the end of the current interest rate reduction cycle.
The report states that the terminal reporate is likely to be settled at 5.50%. This assumes real interest rates (bps) and inflation forecast of 4% for the fiscal year 2025-26. “We believe that this stealth mitigation is now over with a terminal rate of 5.50%,” the report said that RBI’s decision to reduce policy rates and facilitate liquidity conditions could be viewed as a form of “stealth mitigation.”
The report added that future policy measures will be data dependent, in line with what RBI Governor Sanjay Malhotra said in his policy statement. The Monetary Policy Committee assesses a variety of factors, including inflation trends, global geopolitical uncertainty, and even the trajectory of interest rates in the US Federal Reserve before deciding on further interest rate reductions. The bank noted that rate cuts and liquidity enhancement measures announced by the RBI are likely to support credit growth, but the impact will take some time for the real economy to be reflected.
The report says that recapture of credit demand could be two to three quarters, or even longer, especially if global environmental uncertainty continues to affect investment sentiment and capital expenditure plans. The report said that CRR reductions will help improve the multiplier effect of money, reduce the cost of bank funds and support increased net interest (NIMS).
Governor Malhotra notes that the CRR cut can increase the banking system NIM by about 7 bps, which will absorb some of the pressure caused by the 50 bps report cut, leading to faster re-licate of loans associated with external benchmarks. Overall, the report believed that frontload rate mitigation combined with liquidity support measures would drive growth, but its full effect is only shown in time lag.
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Released on June 7, 2025
