The RBI left the repo rate unchanged in its October meeting. This was expected as Inflation is trending lower. The MPC also hinted that there is room to cut rates further if growth needs support. Markets now expect up to 50 bps of rate cuts in this cycle.
Why Banks Benefit
For banks, a stable repo rate supports net interest margins. More importantly, the RBI announced a series of regulatory changes. These are largely positive for the sector.
- Lower risk (5 ppt reduction) weights on home and MSME loans: This frees up capital and boosts return ratios. This adds 10–50 bps to CET1 ratios.
- Relief for bank-promoted NBFCs: The proposed bar on overlapping businesses has been withdrawn.
- Risk-based deposit insurance premium: Strong banks with high ratings will pay lower costs. If premiums fall by 25%, this could add 0.5–1.2% to profits at large banks.
- Relaxed lending rules: Banks can now finance M&A, provide higher IPO funding, and give larger loans against shares. This widens revenue streams for private banks with capital markets exposure. Loan Against Shares (LAS) limit has been raised 5x to ₹1 crore. IPO financing limit has been increased from ₹10 lakh to ₹25 lakh.
- Corporate lending boost: The 2016 rule discouraging loans above ₹10,000 crore sanction limits is repealed. This allows higher credit flow to large corporates, where banks had lost 20 ppt market share to bonds in the last decade.
Risks Still Remain
Not all the changes are positive. Two areas stand out:
- ECL provisioning norms: From April 2027, banks must move to an Expected Credit Loss framework. This could mean extra provisions of 1–2% of loans for PSU and mid-size banks. Large private banks are better prepared.
- Easing of transaction account rules: Big banks earlier benefitted from restrictions on current and cash credit accounts. Relaxation here may reduce their exclusivity advantage.
What This Means for Investors
Overall, the policy is very supportive. Rate cuts so far and ahead would lift credit demand. Regulatory easing creates capital relief, lowers costs, and opens new lending opportunities. Large private banks are best placed to benefit. PSU and mid-size banks face more challenges, but phased ECL norms give them time to adapt.
The RBI is balancing growth with prudence. For investors, this means India’s banking sector remains a core driver of the economy. Selectivity is key. The best opportunities lie in strong, diversified lenders that can capture both retail and corporate upside.
