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RBI changes stance to calibrated tightening; rate cycle increasingly supportive for bank margins”

ICICIdirect Research 09 Oct 2026 DISCLAIMER

RBI raised the repo rate by 25 bps to 5.50% and shifted the stance to “calibrated tightening”, signaling more hawkish policy bias.
FY27 CPI inflation has been revised up to 5.2% from 5.0%, while Q1FY28 inflation is projected at 5.6%, with RBI flagging continued supply-side pressures amid geopolitical volatility and deficient Southwest monsoon.
At the same time, FY27 real GDP growth has been revised up to 7.1% from 6.7%, indicating resilient growth despite external uncertainties and volatility.
With market participants looking for another 50–75 bps of tightening, taking the repo rate toward ~6.0–6.25%, the 10-year yield near ~7.25% appears to discount a large part of the domestic rate cycle; however, higher global yields, crude prices and broader risk premia could keep bond yields elevated and limit treasury gains.
For banks, the rate-hike cycle should turn increasingly supportive for margins from Q3 onwards. With around 68% of floating-rate loans linked to external benchmarks, we estimate that a 25 bps repo hike could drive ~14–15 bps of margin expansion on industry level, as asset yields reprice. The transmission on the liability side could be slower given abundant system liquidity, while rates on a meaningful portion of term deposits, including FCNR(B) deposits raised under recent mobilisation window, are already locked in and may remain unchanged in the near term.
In terms of relative benefit, large private banks should gain the most, followed by PSBs and then mid-sized private banks, reflecting EBLR exposure, deposit mix and the pace of liability repricing. Although Q2 margins may remain under pressure, the benefit of higher lending rates should become more visible from Q3, with PSBs likely to see the uplift on a more staggered basis.

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