Impact of Deposit Rate Cuts on Lending Practices

In his latest policy statement, the RBI Governor outlined how the 100 basis points (bps) cut in the policy repo rate during the current easing cycle has been transmitted across different segments of the financial system. Money Market: Following the cumulative 100 bps cut, the weighted average call rate (WACR) eased by 108 bps. Since the February policy, the 3-month Treasury Bill yield has fallen by 110 bps, the 3-month commercial paper (CP) rate for NBFCs by 161 bps, and the 3-month certificate of deposit (CD) rate by 170 bps. This shows a rapid pass-through in short-term funding costs. Bond Market: Government securities have reacted, though with varying intensity. The 5-year G-Sec yield has dropped by 63 bps, while the 10-year benchmark (6.79 GS) yield is down by 28 bps since February. Corporate debt markets mirrored this trend, with 5-year AAA-rated corporate bond yields falling by 56 bps, signalling improved financing conditions for high-quality issuers. Credit Market: In lending, the weighted average lending rate (WALR) of scheduled commercial banks declined by 71 bps for fresh rupee loans between February and June 2025, with 55 bps of this directly due to policy rate cuts. For outstanding rupee loans, the WALR moderated by 39 bps in the same period. On the deposit side, the weighted average domestic term deposit rate (WADTDR) on fresh deposits eased by 87 bps, reflecting lower funding costs for banks. Other Channels: While the Governor did not specifically mention them, transmission is also operating through the exchange rate and asset price channels, as seen in movements in the forex market and equity valuations. Together, these developments suggest that the RBI’s earlier rate cuts are steadily permeating the economy, though the complete effects,especially in retail credit, are still unfolding.

Your Home Loan Lender Choice Matters More Than You Think – Here's Why! 100 bps repo rate cut. Sounds great, right? But here's the reality check: not all borrowers are benefiting equally. India's inflation has cooled dramatically to just 0.25% in October 2025 – the lowest on record. This has strengthened expectations of another 25 bps rate cut by the RBI in the December MPC meeting. While these macroeconomic tailwinds should benefit all home loan borrowers, the data tells a strikingly different story. The Uneven Benefit of Rate Cuts Since February 2025, the RBI has reduced the repo rate from 6.5% to 5.5%. But the transmission of this benefit has been shockingly uneven across lending institutions (average values shown below), as per recent research by Dev Patel: - Public Sector Banks: 89 bps reduction – highest transmission - Housing Finance Companies: 56 bps reduction - Private Banks: 37 bps reduction   - NBFCs: 24 bps reduction - Small Finance Banks: 0 bps reduction The Hidden Cost of Convenience NBFCs and Housing Finance Companies often attract borrowers with faster sanctions. But convenience at origination doesn't guarantee value over 20-30 years. The initial appeal of instant disbursal can quickly fade when rate cuts don't reach your EMI. Your Lending Benchmark Determines Your Savings Here's what most people don't know: only 63% of home loans are linked to the transparent Repo Rate (EBLR), which ensures quick and effective transmission of rate cuts. The remaining 37% are still tied to MCLR or older benchmarks – structures that carry higher borrowing costs, lack transparency, and take a frustrating 6-12 months to pass on rate benefits. What This Means for People As financial advisors, we educate our clients to look beyond: ✓ Processing fees and initial interest rates   ✓ Speed of loan approval   ✓ Attractive promotional offers And start evaluating: ✓ Lending benchmark (EBLR vs MCLR)   ✓ Historical rate transmission effectiveness   ✓ Long-term grievance redressal track record  The Bottom Line Macroeconomic events like inflation trends and repo rate decisions directly impact people's wealth. A 100 bps difference in rate transmission on a ₹50 lakh loan over 20 years can mean lakhs in additional interest outgo. Doing stronger due diligence at the beginning of the loan-taking journey isn't just prudent – it's financially consequential. The convenience of today shouldn't cost you your financial flexibility tomorrow.

Repo Rate Down. But Why Are Lending Rates Still High? The Reserve Bank of India (RBI) has cut the repo rate, hoping to make credit cheaper and boost the economy. But banks aren’t reducing interest rates for new borrowers. Why? It’s a classic Catch-22 situation for the banking system: Deposit growth is sluggish — banks don’t have enough low-cost funds. Now here’s the dilemma: If banks cut deposit rates to lower their cost of funds, savers will pull out money and shift to mutual funds, debt schemes, and other alternatives. But if they keep deposit rates high, their cost of funds stays elevated, and they can’t reduce lending rates — even if the repo rate is cut. They need to maintain the NIMs (Net interest margins) So, even though the RBI is easing, banks are stuck between: Retaining depositors, and Passing on rate cuts to borrowers. In short: It’s not just about repo rates. It’s about trust, liquidity, investor alternatives, and margin management. #Catch22 #RepoRate #InterestRates #DepositRates #BankingTrends #MSMEFinance #CreditGrowth #FinDestination #MonetaryPolicy #InvestorBehaviour #MutualFunds #RBI #SMELending