ICRA: Tariff Uncertainty May Restrict Scope for RBI Rate Cut
ICRA Warns Global Uncertainty from Tariffs May Impact RBI’s Repo Rate Cuts in FY25
ICRA has cautioned that the ongoing global uncertainty stemming from tariffs could potentially hinder the extent of repo rate cuts by the Reserve Bank of India in the current financial year. According to Karthik Srinivasan, Senior Vice President and Group Head of Financial Sector Ratings at ICRA, “RBI’s decision will depend largely on domestic factors, but the global landscape, especially tariff-related issues, cannot be overlooked.” Srinivasan also mentioned that the upcoming monsoon season might influence the apex bank’s rate cut decision.
ICRA anticipates a 25-basis point reduction in the repo rate during the upcoming Monetary Policy Committee meeting. Srinivasan indicated that internally, the expectation is for a 75-basis point rate cut following the reduction in April. Since February, RBI has already lowered the repo rate by 50 basis points. “Given RBI’s current emphasis on fostering economic growth, coupled with controlled inflation figures, further rate cuts are foreseeable to support domestic consumption and business activity amidst global uncertainties,” he explained.
While the transmission of policy rates has shown improvement in recent years, banks may encounter challenges in significantly lowering deposit rates due to ongoing deposit mobilization difficulties. Srinivasan noted that banks will have to strategically decide whether to protect their margins or accept a potential margin decrease. Regarding the impact of geopolitical tensions on the banking sector, he suggested vigilance, particularly in export-oriented industries.
Srinivasan also touched upon the microfinance segment, indicating that stress levels are expected to stabilize by the first half of the current financial year. He mentioned that entities with stronger balance sheets may experience lower impacts, while those with weaker positions could continue to face elevated stress levels in FY26. In terms of profitability, he predicted improved performance in the latter part of the financial year, driven by potential rate cuts and higher treasury gains.
