RBI repo rate cut by 50 bps: Corporate borrowing likely to remain tepid

CRR cut to partially offset margin pressure from rate cuts from H2 FY26

The Reserve Bank of India’s (RBI’s) decision to reduce the repo rate by 50 basis points (bps) to 5.50 per cent will nudge credit growth, said industry insiders. However, they said corporate borrowing from traditional banks might take longer to pick up as alternative sources of funding continue to remain attractive.

 

They also said the 50-bp rate cut would weigh on banks’ net interest margins (NIMs), though this will be partially offset in the second half of FY26 by the 100 bps cash reserve ratio (CRR) cut that the RBI has said it will implement from September onwards.

 

“Apart from providing liquidity, it (the CRR cut) will also reduce their (banks’) costs and improve their NIMs by about 7 bps, at least, that is our estimate,” RBI Governor Sanjay Malhotra said, explaining the rationale behind the CRR cut.

   

The CRR cut is expected to release primary liquidity of about Rs 2.5 trillion into the banking system by December.

 

Industry insiders believe that sharp rate cuts make alternative funding sources more attractive, as corporates prefer raising funds through the debt markets and external commercial borrowings (ECBs), instead of relying on traditional banking channels, especially since transmission in bank lending rates takes time. 

 

“There will be healthy credit growth from the MSME and retail segments. However, lending demand from large corporates might still take time to pick up, as they are undertaking capex in a modular manner,” said a private banking official.

 

“Secondly, they have multiple sources of raising funds, including the debt capital market, where NCD rates have also fallen sharply. Thirdly, corporates also have access to ECBs, which reduces their reliance on bank borrowings, and hence, overall growth is not very high,” said the official.

 

In response to the policy repo rate cut of 50 bps in the current easing cycle (up to June 4), the weighted average lending rate (WALR) on fresh rupee loans and outstanding rupee loans declined by 6 bps and 17 bps, respectively, during February-April 2025, reflecting policy rate transmission to lending rates. The weighted average domestic term deposit rates (WADTDR) on fresh deposits declined by 27 bps, while WADTDR on outstanding deposits declined by 1 bp during the same period.

 

According to bankers, the RBI has timed the CRR cut well ahead of the festival season, as credit growth is typically back-ended and banks require liquidity support during that time. The infusion of liquidity is expected to help banks manage demand.

 

“The CRR cut will aid margins by 5-6 bps as per our calculations, which can partially offset the impact coming from the repo rate cut,” said Macquarie Capital in a report.

 

“For the first two quarters pressure on margins will continue to persist owing to the 50 basis points rate cut. However, pressure on margins will ease from the second half with the help of 100 bps reduction in CRR. We are expecting margins to improve by 4-5 basis points,” said a senior public sector banker.

 

“For the first two quarters, pressure on margins will continue due to the 50-bp rate cut. However, pressure on margins will ease in the second half with the help of the 100 bps reduction in CRR. We expect margins to improve by 4-5 bps,” said a senior public-sector banker.

 

"With 100 bps cut in CRR to be implemented in phases starting September, banks will see a benefit of 3-4 bps on the interest margins for FY26,” said Icra President Sachin Sachdeva.