PSBs Lead in Rate Cuts Amid RBI’s 100-Bps Repo Reduction

In the ongoing policy rate easing cycle, which began in February 2025, public sector banks (PSBs) have reduced their lending and deposit rates more sharply compared to private banks, as highlighted in the Reserve Bank of India’s (RBI) July bulletin.

The move follows the Monetary Policy Committee’s (MPC) decision to cut the repo rate by 100 basis points (bps) between February and June 2025, bringing the rate down to 5.5%.

Sharp Reductions in Lending Rates

Between February and May 2025, PSBs reduced their weighted average lending rates on fresh rupee loans by 31 bps and on outstanding loans by 17 bps. In comparison, private banks cut these rates by 20 bps and 15 bps, respectively. Foreign banks were even more aggressive, slashing lending rates by 49 bps on fresh loans and 52 bps on outstanding loans.

Overall, the weighted average lending rates of scheduled commercial banks declined by 26 bps on fresh rupee loans and 18 bps on outstanding loans during this period, with domestic banks showing a slightly slower pace of reduction (24 bps and 16 bps, respectively).

Deposit Rates Hit Historic Lows

PSBs have also reduced their deposit rates significantly, particularly on fresh deposits, which fell by 47 bps between February and May 2025, compared to a 41-bps reduction by private banks. On outstanding deposits, however, PSBs cut rates by just 3 bps, while private banks raised their rates by 5 bps during the same period.

The savings deposit rates at some PSBs are now at their lowest levels since deregulation in 2011, reflecting the sector’s efforts to pass on policy rate benefits.

Credit Growth Remains Muted Despite Rate Cuts

Despite the 100-bps cut in the repo rate and subsequent reductions in lending rates, credit growth has remained sluggish. Non-food bank credit growth dropped to 9.8% in May 2025, compared to 12% in February 2025. Year-on-year credit flows across most sectors also slowed in May relative to April.

Also Read: RBI Governor Signals Possible Further Rate Cuts Amid Easing Inflation!

Conclusion

The RBI’s repo rate cuts have led to significant adjustments in lending and deposit rates, with PSBs leading the charge. However, the muted credit growth suggests that lower rates alone may not be enough to spur borrowing, with demand-side factors and economic conditions likely playing a bigger role.

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