Indian banks are yet to cut base rates in response to the central bank's 50 bps cut during 2015.

Credit growth might lag rate cuts by 6 to 9 months.

Base rate cuts will put pressure on banks' net interest margins, but could be offset by gains in bond  portfolio.

Bank earnings might remain under pressure during 1H15.

Expect the central bank to further cut policy rates by 25 to 50 bps during 2015.

The Reserve Bank of India has cut policy rates twice in 2015 in out-of-scheduled policy meetings - bringing rates to 7.5% from 8%. This was mainly due to lower consumer-level inflation, which is currently running at around 5%. The Indian banking sector has been experiencing slowdown in credit growth, especially for the past 12 months. While part of the credit demand has moved to the commercial paper (CP) market due to quick transmission of policy rate cuts, we see that the CP market is just 4% of the banking sector, and hence will not be able to divert credit demand from the banking system.