The RBI reversed the interest rate cycle by announcing a rate cut of 25bps, after holding rates steady for a couple of years. This was largely anticipated post the liquidity boosting measures announced in late Jan’25. The GDP growth for FY25 has been revised downwards to 6.4% vs 6.6% previously. For FY26, GDP growth is expected to hold up at 6.7%. Inflation estimates for FY26 are expected to be closer to the regulator’s tolerance limit. We could expect another rate cut of 25bps in the upcoming meetings.
The credit growth momentum for banks has evidently slowed down either owing to a cautious approach towards lending amidst asset quality concerns in the unsecured segment or softening demand. However, we see positive levers for supporting credit growth revival from the recent budget announcements. The rate cut can be viewed as a positive for lenders having a higher share of fixed rate portfolio, especially credit card issuers, vehicle financiers and gold financiers. On the other hand, banks with a higher share of floating-rate loans would continue to face near-term headwinds on margins. We would remain watchful of asset quality trends for banks, especially those with meaningful exposure to unsecured lending, wherein recovery is still a couple of quarters away. Currently, we prefer Bajaj Finance, Cholamandalam Inv & Finance and Shriram Finance as they would be key beneficiaries in the rate cut cycle.
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