Kotak forecasts RBI to add 50 bps in two meetings, ending at 6.0% repo rate

Kotak Institutional Equities projects that the Reserve Bank of India will implement an additional 50 basis points of rate hikes across its next two policy meetings, pushing the terminal repo rate to 6.0%. This outlook comes after the RBI's latest 25-basis-point increase to 5.5% and a move from a neutral to a calibrated tightening stance, driven by higher inflation expectations. The brokerage argues that despite the upward pressure, the overall tightening cycle is likely to stay shallow, with persistent food and energy shocks the only factor that could extend it.

It emphasizes that the banking sector is well-positioned, featuring clean balance sheets and stricter underwriting rules adopted after regulatory scrutiny of unsecured lending in FY2023-24, which should curb credit-risk accumulation. Credit demand remains robust, primarily from corporate borrowers whose balance sheets are stronger than in previous cycles, though loan growth is expected to slow as short-term financing needs normalize post-Middle East crisis. Finally, Kotak suggests that large private banks stand to benefit from higher net interest margins as fixed-rate deposits support a pro-cyclical shift in loan yields.