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The Reserve Bank of India (RBI) may have reached the end of its current interest rate easing cycle, a recent report released by the Union Bank of India indicated. The bank's assessment suggested that the terminal repo rate will likely stabilise at 5.50 per cent, based on the assumption of a real interest rate of 150 basis points and an inflation forecast of 4 per cent for the fiscal year 2025-26.

“We believe that this stealth easing concludes the rate cutting cycle for now with terminal rate of 5.50 per cent,” the report stated, underscoring a shift in the central bank’s monetary policy trajectory.

The move is being interpreted as a form of "stealth easing", referring to the RBI’s simultaneous efforts to lower rates and improve liquidity without making aggressive announcements, reported ANI.

All Eyes On Inflation, Global Developments, And US Fed

While the latest actions mark a shift, future rate decisions are expected to hinge on evolving economic data. Echoing the sentiment expressed by RBI Governor Sanjay Malhotra, the report noted that the Monetary Policy Committee (MPC) would closely monitor factors such as inflation patterns, geopolitical tensions, and the interest rate direction of the US Federal Reserve before considering any further adjustments.

Union Bank emphasised that while the current measures are likely to support credit growth, the real-world impact will take time to materialise. The report estimated that credit demand recovery may take two to three quarters, or potentially longer, especially if global headwinds continue to disrupt investor confidence and capital spending.

CRR Cut to Aid Liquidity and Margins

A key component of the RBI’s recent announcements is the 100 basis point reduction in the Cash Reserve Ratio (CRR), which will be implemented in four stages. This move is expected to enhance the money multiplier effect, lower banks’ cost of funds, and boost net interest margins (NIMs).

Governor Malhotra noted that this CRR cut could increase banking system NIMs by about 7 basis points, offsetting some of the margin pressure caused by the 50 basis point repo rate reduction, which accelerates loan repricing.

While the frontloaded monetary easing and liquidity measures are designed to stimulate economic growth, their full benefits may unfold only gradually.