A fresh report by Jefferies predicts the Reserve Bank of India (RBI) will cut its policy rates by 50 basis points in the first half of 2025. The prediction comes after the central bank’s recent monetary policy changes, such as a sharp cash reserve ratio (CRR) change in the latest Monetary Policy Committee meeting.

The shift of the central bank from a withdrawal position to a neutral liquidity position, combined with the CRR reverting to its pre-pandemic level of 4% of net demand and time liabilities, indicates a strategic shift towards facilitating economic growth and investment.

These expected rate cuts have nuanced implications for the banking industry.

Banks may lose 3-8% of their earnings from a 10 basis point fall in net interest margins, with public sector banks being especially exposed. Even with stable deposit rates, banks have seen increasing funding costs over the last year as a result of changes in their funding mix and repricing dynamics.

The analysis reveals contrasting patterns in asset quality across the banking landscape. While lenders focusing on upper-tier clients demonstrate resilience, non-bank financial companies and smaller private banks serving lower-tier clients face mounting pressures. The microfinance sector remains particularly challenged, potentially impacting mid-sized bank performance.

For FY26, experts foresee a sustained improvement in the quality of assets as stressed assets are fully recognized and new lending trends stabilize. Economic growth will be instrumental in bolstering the SME loan space, although particular categories of lending will remain subject to headwinds.

The banking industry now is in a crunch adjustment phase as it readjusts to such policy shifts. Although longer-term prospects point toward favorable momentum, institutions have to navigate carefully short-term issues of squeezed margins and changing asset quality dynamics.