BNP Paribas Forecasts RBI Rate Cuts to Boost Bank Earnings by 2026

BANKINGFINANCE

Overview

BNP Paribas predicts the Reserve Bank of India will implement a 25 basis point repo rate cut in February 2026, bringing total easing to 150 bps. The move aims to reduce funding costs and enhance bank margins, projecting private banks' EPS growth to reach double digits by the second quarter of FY27 due to improved margins and asset performance.

RBI Policy Outlook

BNP Paribas Research anticipates the Reserve Bank of India will implement a further 25 basis point reduction in the repo rate in February 2026. This action would mark a cumulative easing of 150 basis points within the current monetary policy cycle.
The firm views the RBI's monetary policy decisions as primarily driven by the domestic inflation-growth balance. Anticipated inflation prints are unlikely to derail the case for continued monetary accommodation, reinforcing the projection for this final rate adjustment.

Banking Sector Impact

The expected rate cuts are poised to gradually reduce funding costs for financial institutions. This dynamic is projected to sustain and support bank margins throughout fiscal year 2027.
Consequently, private sector banks are forecast to experience a significant uplift in earnings. Earnings Per Share (EPS) growth for these banks could climb into the teens by the second quarter of fiscal year 2027, fueled by margin expansion and robust asset quality.
While loan rates reprice quickly, the full benefits of lower deposit costs and potential growth in low-cost CASA deposits will take time to materialize. Net interest margins are expected to rebound after a dip in the fourth quarter of fiscal year 2026, displaying a gradual upward trend.

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