MUMBAI: India Inc has welcomed the Reserve Bank of India’s decision for a repo rate cut, viewing it as a step towards boosting consumption and investment. Industry bodies believe that the central bank’s move will reinforce the government’s growth agenda, particularly in manufacturing, MSMEs, and infrastructure.
The Monetary Policy Committee, chaired by RBI Governor Sanjay Malhotra, announced a 25 basis points reduction in the benchmark rate, bringing it down to 6.25 per cent. This marks the first rate cut since May 2020 and follows the last rate hike in February 2023, when the policy rate was raised by 25 basis points to 6.5 per cent.
Industry leaders view this calibrated approach as a balance between fostering economic expansion and maintaining financial stability.
Chandrajit Banerjee, Director General at CII, said the rate cut is expected to complement the consumption-boosting measures announced in the Union Budget 2025-26, strengthening domestic demand drivers.
FICCI President Harsha Vardhan Agarwal termed the repo rate cut a timely and forward-looking step. He said banks should pass on this benefit by lowering lending rates while adding that the RBI’s neutral stance suggests further rate cuts could be on the horizon if inflation remains under control.
Home loans to get cheaper, but at what cost?
With home loans already at record lows – some banks lending at 8.5 per cent, which barely leaves them with any meaningful spread – the rate cut forces further downward pressure on lending rates. Since most home loans are directly linked to the repo rate, borrowing costs will drop by at least 25 basis points when rates reset. Some banks will implement this reset as early as the first of next month.
However, deposit rates are unlikely to follow suit. Unlike lending rates, deposits are not linked to external benchmarks. More importantly, banks are already struggling to mobilise deposits, even at higher rates, as deposit growth in the banking system lags significantly behind loan growth.
A senior banking analyst said loan rates will automatically come down, but banks may not be able to cut deposit rates given their current challenges in raising funds.
This could put further pressure on bank margins, as their cost of funds remains high while lending rates decline.
The deposit growth challenge
Banking system data indicates a widening gap between credit growth and deposit growth. While credit demand has remained strong, deposit mobilisation has not kept pace, forcing banks to offer higher interest rates to attract funds.
This puts banks in a difficult position. Lower lending rates will erode profitability, but keeping deposit rates high will squeeze margins even further.
Unlike the pre-COVID years when lower repo rates encouraged banks to aggressively cut deposit rates, the current scenario is different. Banks are already paying relatively high deposit rates to retain liquidity amid sluggish deposit growth.
A banking industry expert explained that if banks lower deposit rates now, they risk further weakening their funding base. If they don’t, their net interest margins (NIM) will take a hit. It’s a tricky balance.
NBFCs: A different story?
While banks face margin pressure, non-banking financial companies may see some relief. Since many NBFCs do not rely as heavily on retail deposits, their borrowing costs may decline faster than those of traditional banks.
