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Public sector banks cut rates more than private peers: RBI report
The decline in the weighted average lending rates on fresh rupee loans by public sector banks was 31 basis points till May, while that for private banks was 20 basis points. Foreign banks saw a sharper decline of 49 basis points (see table).
For fresh deposits, rates for public sector banks fell 47 basis points compared to a 41-basis-point drop by private banks.
The six-member rate-setting panel cut the policy repo rate by 50 basis points between February and May. In June, the rate was further reduced by another 50 basis points.
'During the current easing cycle (February–May 2025), the decline in weighted average lending rates on both fresh and outstanding rupee loans was higher for public sector banks (PSBs) as compared to private sector banks (PVBs),' the State of the Economy report of the RBI said.
'In response to the 100-bps reduction in the policy repo rate since February 2025, banks have adjusted their repo-linked external benchmark-based lending rates downward by 100 basis points and marginal cost of funds-based lending rates by 10 basis points,' it added.
Consequently, the weighted average lending rates on fresh and outstanding rupee loans of scheduled commercial banks declined by 26 basis points (domestic banks: 24 bps) and 18 basis points (domestic banks: 16 bps), respectively, during February–May 2025.
'System liquidity remained in surplus to facilitate a faster transmission of policy rate cuts to the credit markets,' the report said.
The report also observed that banks have been reducing savings account deposit rates, with some state-run banks now offering historically low rates.
'Banks have also reduced their rates on savings deposits. Currently, the savings deposit rates of some PSBs are prevailing at a historical low, since their de-regulation in 2011,' the report noted.
State Bank of India, the country's largest lender, and HDFC Bank, the second-largest, both offer 2.5 per cent on savings account deposits.
While noting that the rates on small savings schemes were kept unchanged by the government for the second quarter of the current financial year, the report said, 'The prevailing rates on these instruments are higher than the formula-based rates by 33–118 basis points.'
On loan growth, the report said average bank credit growth continued to moderate across key sectors of the economy in May 2025. Credit to non-banking financial companies (NBFCs), on a year-on-year basis, contracted in May 2025 as they raised significant debt from capital markets via private placements.
The report also highlighted a sharp deceleration in retail credit, due to a decline in personal loans, vehicle loans, and credit card outstanding. 'While overall credit to the industrial sector recorded subdued growth due to a decline in credit growth to infrastructure, credit to the MSME sector continued to remain buoyant,' it said.
Commenting on the Indian economy, the report said it remained largely resilient, supported by strong fundamentals, despite global uncertainties. It said lower inflation and favourable farm sector prospects would support aggregate demand.
'Easing inflation, improving kharif season prospects, front-loading of government expenditure, targeted fiscal measures, and congenial financial conditions for faster transmission of rate reductions should support aggregate demand in the economy going forward.'
The report observed that financial markets seem to have taken trade policy uncertainties in their stride, possibly reflecting optimism about reaching trade deals that are less disruptive to the global economy.
'Even so, underpricing of macroeconomic risk by financial markets remains a concern. The average trade tariff rates are set to touch levels unseen since the 1930s,' it said.
The report emphasised the importance of building more resilient trade partnerships, presenting a strategic opportunity for India to deepen integration with global value chains.
'In addition, measures to accelerate domestic investment in infrastructure and structural reforms aimed at improving competitiveness and productivity would build resilience while supporting the growth momentum,' it added.
The report was authored by RBI staff under the guidance of Poonam Gupta, deputy governor, RBI. The views expressed are those of the authors and not of the central bank, it was clarified.
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