RBI's Liquidity Boost To Aid Rate Cut Transmission, Fitch Sees Easing Funding Conditions In 2025

New Delhi: Fitch Ratings on Wednesday said the RBI's substantial liquidity infusions into the banking system since early 2025 and its commitment to keep sufficient liquidity in the system will facilitate transmission of 100 basis points rate cut in 2025.

The Reserve Bank of India (RBI) has injected about Rs 5.6 lakh crore (2 per cent of system assets) of durable funding in 2025 through government securities purchases, resulting in surplus system liquidity since March.

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Its decision to cut the cash-reserve ratio (CRR) by 100 bps will further release about Rs 2.7 lakh crore in liquidity in a phased manner, the global rating agency said.

Fitch, in a statement, said the RBI's substantial liquidity infusions into the banking system since January 2025 and its commitment to provide sufficient liquidity in the future have significantly eased funding conditions.

"This is evident in rising liquidity surpluses and falling deposit costs. We expect funding conditions to stay accommodating and facilitate transmission of 100 bp in rate cuts in 2025. This is also supported by a reversal in the rise in the sector's loan/deposit ratio amid slower loan growth, which should ease pressure on banks to compete for deposits," Fitch said.

The RBI has cut policy interest rates by a total of 100 basis points in 2025, starting with a quarter-point reduction in February -- the first cut since May 2020 -- and another similar-sized cut in April. In June, it cut rates by a higher-than-expected 50 basis points.

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Fitch said these measures signal a significant shift in the RBI's liquidity stance since its October 2024 report, as it aims to spur loan growth without intensifying funding cost pressures.

"Surplus liquidity conditions will likely accelerate the decline in the cost of fresh deposits. Nevertheless, we expect a 30 bp contraction in margins in the financial year ending March 2026 (FY26). However, margin pressures should moderate as deposit costs fall in FY27, helped by lower CRR requirements," Fitch said.

The RBI in its monetary policy review in June announced a steep 1 per cent cut in cash reserve ratio (CRR) to bring it down to 3 per cent in four equal tranches.

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This reduction will be carried out in four equal tranches of 25 bps each with effect from the fortnights beginning September 6, October 4, November 1, and November 29, 2025.

A CRR cut means that the commercial banks would have to maintain a lower level of 3 per cent in liquid cash form with the RBI, allowing them to have higher funds for lending.

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