MUMBAI: The Reserve Bank of India’s aggressive monetary easing through a100 basis points rate cut in 2025, coupled with large-scale liquidity infusions, is expected to ease funding conditions across the banking system and support credit growth.
However, the actual benefit for borrowers may not be immediate or uniform, with the speed of transmission depending significantly on the type of loan and its underlying benchmark.
Fitch Ratings, in its latest note on Wednesday, said the RBI’s measures – including a 100 basis points rate cut and a steep 1 percentage point cut in the cash reserve ratio (CRR) – will collectively improve system liquidity and bring down the cost of funds for banks.
This, in turn, should gradually translate into lower lending rates across sectors.
Since January 2025, the RBI has injected approximately Rs5.6 lakh crore, equivalent to 2 per cent of system assets, through government securities purchases.
The move has created a liquidity surplus in the banking system since March. Additionally, a 100 basis point CRR cut, announced in June, is being rolled out in four tranches of 25 bps each – effective from September 6 to November 29, 2025. This phased release is expected to free up an additional Rs2.7 lakh crore in lendable funds for banks.
Fitch said these steps mark a decisive shift in the RBI’s liquidity stance since October 2024. The central bank appears focused on reviving credit flows without stoking deposit competition among banks.
Early signs of this strategy playing out are visible in the rising liquidity surplus and softening deposit rates.
Transmission timeline
However, despite the improved monetary environment, the timing of rate transmission to end borrowers will vary depending on the structure of individual loan agreements. Loans directly linked to external benchmarks like the repo rate or Treasury bill yields typically reflect policy changes within a review cycle – often a few weeks.
In contrast, loans linked to the marginal cost of funds-based lending rate (MCLR) or the older base rate system may take longer to adjust, since they are reviewed quarterly or semi-annually, and rely on internal cost structures.
Borrowers with fixed-rate loans may not see any benefit at all in the short term, unless they choose to refinance. Similarly, small and informal-sector loans may be slower to respond due to weaker competitive pressures in those segments.
While the liquidity easing is expected to lower banks’ cost of funds, Fitch anticipates a 30 basis point contraction in banks’ net interest margins (NIM) in FY26.
This would reflect a lag in repricing of older, higher-yielding assets, even as deposit costs fall. The margin pressure, however, is expected to moderate in FY27, supported by lower CRR requirements and stabilising funding costs.
Rate cuts after five years
The RBI’s rate cut cycle began in February 2025 with a 25 bps reduction – the first since May 2020 – followed by another 25 bps in April and a larger-than-expected 50 bps cut in June. These moves indicate the central bank’s confidence in managing inflation risks while shifting focus toward supporting growth.
For borrowers, this means the environment for credit is turning more favourable. Corporate borrowers and large-ticket retail borrowers may benefit first, especially if their loans are repo-linked.
Retail customers with MCLR-based home or personal loans may start seeing benefits a quarter or two later. Those seeking to refinance or switch to lower-rate loans may find better options emerging toward the end of FY26, once CRR reductions are fully absorbed and funding costs settle further.
Ultimately, while the monetary policy signals are strong and the liquidity framework is supportive, the speed and extent of benefit will depend on how banks transmit these changes to customers – and how loan contracts are structured.
The RBI appears determined to stimulate lending without putting undue pressure on deposit rates. But for many borrowers, especially those in fixed-rate or base-rate arrangements, the rate cut story may take longer to play out.
