Despite Repo Rate Cut, Bank Lending Rates Rise to 8.8% in July 2025

Even after the RBI’s decision to lower the repo rate by 50 basis points in June 2025, banks surprisingly increased their interest rates on new loans in July, as per news reports. The unusual divergence is attributed to a shift in lending composition, particularly a rise in high-yield MSME loans.

New Loans See Higher Interest Despite Policy Rate Cut

As per RBI data, the weighted average lending rate (WALR) on new bank loans rose to 8.8% in July 2025, compared to 8.62% in June. This increase came even though the Reserve Bank of India had slashed the repo rate by 50 basis points to boost borrowing. Unlike past instances where repo rate cuts led to reductions in lending rates, banks this time adjusted pricing dynamics due to a spike in higher-yielding loan categories.

MSMEs Drive Lending Rate Uptick

Bankers attributed the rate rise to increased loan disbursements to micro, small and medium enterprises (MSMEs). These loans generally carry higher interest charges and tend to increase ahead of the festive season. The higher proportion of MSME credit contributed to the overall uptick in WALR, offsetting the intended easing effect of the repo rate reduction.

Deposit Costs Decline, Credit Growth Accelerates

Interestingly, while lending rates climbed, banks managed to reduce their funding cost. The weighted average domestic term deposit rate for fresh deposits dropped to 5.6% in July from 5.75% in June. At the same time, credit growth remained healthy, with year-on-year bank credit expanding by 10.5% as of August 8, 2025.

Read More: RBI Projects 21.5% Jump in Private Capex to ₹2.67 Lakh Crore in FY26!

Interest Rate Trends in 2025 vs Prior Cycles

This behaviour is a contrast to previous scenarios. During earlier phases in 2025, smaller repo cuts by the RBI led to modest declines in WALR. For example, a 25 basis point cut in April led to a 6 basis point drop in lending rates. Similarly, during rising rate periods like the post-Ukraine crisis, lending rates consistently climbed in response to each policy hike.

Conclusion

Despite a favourable reduction in policy rates, lending rates moved upward in July 2025. This shift can be largely explained by a changing loan mix favouring higher-yielding MSME borrowers. Meanwhile, with declining deposit costs and strong credit growth, banks appear set to maintain lending momentum into the festive season.

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