Explainer: RBI cuts repo rate by 50 bps. How will it impact lenders and borrowers?
Mumbai: The Reserve Bank of India's (RBI) Monetary Policy Committee on Friday cut the repo rate by 50 basis points (bps) to 5.50%. This is the third straight rate cut, leading to a cumulative reduction of 100 bps since the easing cycle began in February.
As part of the monetary policy decision to support growth, the committee also reduced the cash reserve ratio (CRR)—the amount of funds that banks need to park with RBI –by 100 bps. However, the rate-setting panel changed the policy stance from 'accommodative' to 'neutral', citing limited headroom for monetary policy to support growth.
How will RBI's actions impact bank customers?
The Reserve Bank of India's 50 bps rate cut on Friday is likely to lead to a reduction in deposit interest rates, hurting bank customers who have enjoyed higher returns amidst fierce competition for deposits.
Fixed deposit interest rates are expected to drop as banks align them with lower asset pricing.
Also read: RBI aims to boost economic growth, liquidity with jumbo rate and CRR cuts
Since the second rate cut in April, several banks have already announced reduction in rates on some buckets of savings account deposits and fixed deposits in order to protect margins as loan yields fall.
Fixed deposit rates have fallen by 30-70 bps since February 2025, according to a research report by SBI on Friday, which said that further deposit rate cuts can be expected from banks given expectations of a rapid transmission of policy rate cuts.
However, while depositors might take a hit, bank borrowers stand to benefit from a reduction in their loan rates. To ensure greater transparency and direct transmission of monetary policy, banks are now required to price all their floating rate retail and small business loans using the External Benchmark Lending Rate (EBLR), with the repo rate serving as the primary benchmark.
Accordingly, retail customers and small business borrowers will see a reduction in loan rates and equated monthly installments (EMIs) for existing as well as fresh loans. Banks are required to reset these rates at least once every three months.
Also read: RBI reschedules August MPC meeting due to administrative exigencies: Check new date here
'Today's announcement will not only push banks' external benchmark linked lending rates lower, but will also reduce marginal cost of funds-based lending rate (MCLR) and deposit rates, thereby bringing in greater pace and intensity to transmission," said Siddhartha Sanyal, chief economist and head research of Bandhan Bank.
How will the rate cut impact lenders?
Lenders stand to face immediate pressure on margins as transmission of the 50 bps rate cut tends to be faster on the asset side through EBLR-linked loans. On the other hand, deposit transmission usually takes 3-6 months, which implies that banks will continue to face pressure on margins for the next two quarters.
Even so, deposit mobilization challenges for banks are seen easing given the substantial slowdown in credit growth and massive liquidity infusions by the RBI over the past few months. As liquidity improves, banks will likely reduce deposit rates sooner, accelerating the transmission of policy changes.
'The steep cut of 50 bps in repo rate is expected to sharply impact the net interest margins (NIMs) of the banks and Q2FY26 is expected to be the weakest," said Sachin Sachdeva, vice-president, and sector head of financial sector ratings, ICRA Ltd.
Also read: MPC's larger-than-expected rate cut hints at pause to easing cycle: Icra's Nayar
Thereafter, the pressure on NIMs is expected to decline with the benefit starting to flow in from CRR cut and extent of cut taken by banks on their saving rate deposits while the term deposit rates will reprice downward with a lag, said Sachdeva.
Since January, weighted average lending rate (WALR) on fresh loans has fallen from 9.4% to 9.26% in April. In comparison, the weighted average rate on fresh deposits rose to 6.65% in March from 6.49% in February. Following the second rate cut, the average deposit rate fell to 6.3% in April.
Moreover, the surprise 100 bps cut in CRR announced on Friday is expected to offer relief to banks by freeing up their capital, allowing for more lending. The CRR cut, effective from September 2025, will lead to a benefit of 3-4 bps on banks' margins for FY26, ICRA's Sachdeva said.
As per the SBI report cited earlier, the CRR cut will release primary liquidity of around ₹2.5 trillion to the banking system by December, and also help reduce overall cost of funds for banks.
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