RBI's liquidity steps to aid 100 bps rate cut transmission in 2025: Fitch

Credit rating agency Fitch Ratings says ₹5.6 trillion liquidity infusions and cash reserve ratio cut will support loan growth, though banks may see short-term pressure on margins

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The Reserve Bank of India’s (RBI) aggressive liquidity injections this year are likely to ensure the effective transition of the entire 100 basis points of policy rate cuts announced so far in 2025, Fitch Ratings said on Wednesday.

 

Fitch said the RBI’s actions represent a clear policy shift aimed at supporting loan growth while avoiding a spike in funding costs. “This is reflected in increased system liquidity and falling deposit costs, which should enable transmission of 100 basis points in policy rate cuts in 2025,” the credit rating agency said in a statement.

 

The RBI has cut rates three times this year: 25 basis points each in February and April, and a sharper 50 basis point cut in June, marking the first easing cycle since May 2020.

 

₹5.6 Trillion already pumped in

Since January 2025, the RBI has injected about ₹5.6 trillion into the banking system through durable liquidity measures such as government securities purchases. This amounts to roughly 2 per cent of system assets, creating a sustained surplus in liquidity since March.

 

The central bank's additional move to cut the cash reserve ratio (CRR) by 100 basis points, announced in June, is expected to release a further ₹2.7 trillion in liquidity in a phased manner, giving banks more headroom to reduce lending rates and boost credit growth.

 

“These steps have significantly eased funding conditions,” Fitch said. “This is evident in rising liquidity surpluses and falling deposit costs.” 

Margin pressures likely short term

Fitch expects Indian banks’ net interest margins to come under some pressure in the near term, as a large portion of their loan books will be repriced at lower interest rates relatively quickly. 

While falling deposit costs are expected to aid banks, Fitch also projected a 30 basis point contraction in net interest margins in the financial year ending March 2026 (FY26). However, this should ease in FY27 as falling deposit costs begin to offset lost interest income. 

“Surplus liquidity conditions will likely accelerate the decline in the cost of fresh deposits,” Fitch said.

 

Loan growth and risk outlook

Fitch also cautioned that while lower rates may support asset quality, a sharp pickup in loan growth could carry its own risks.

“Funding and liquidity conditions remain sensitive to changes in the central bank’s liquidity stance and shifts in retail savings,” the agency said. Although higher credit expansion may elevate risk, Fitch noted that improved risk pricing mechanisms and ample liquidity could provide a buffer.