CHENNAI: Unlike in the past, most leading commercial banks in India have promptly passed on the repo rate cut announced by the Reserve Bank of India (RBI) to their customers, resulting in a much quicker transition.
The RBI implemented a 50 basis point (bps) reduction in the repo rate on June 6, lowering it from 6% to 5.5%. This move aims to stimulate economic growth by making borrowing more affordable and encouraging investment, particularly in sectors such as housing and micro, small, and medium enterprises (MSMEs).
Following the RBI's policy rate cut, the State Bank of India (SBI), the country's largest lender, announced reductions in its lending rates—cutting the Repo Linked Lending Rate (RLLR) by 50 bps to 7.75% and the External Benchmark Based Lending Rate (EBLR) to 8.15%.
According to SBI, the revised rates are effective from June 15, 2025, and apply to both new and existing borrowers.
Other major banks too have passed on the cuts. Bank of Maharashtra reduced retail loan rates by up to 50 bps, effective June 10, 2025.
HDFC Bank, Canara Bank, and Bank of Baroda also implemented reductions in their Marginal Cost of Funds-Based Lending Rates (MCLR), making loans more affordable for consumers.
However, some banks, including Punjab National Bank (PNB), have maintained their existing MCLR rates, indicating a more cautious approach.
Implications of lower interest rates
The reduction in lending rates is expected to have several positive effects. Borrowers will benefit from reduced EMIs on home, auto, and personal loans, easing their financial burdens.
More affordable loans may encourage increased borrowing, stimulating demand in the housing and automobile sectors.
Lower interest rates can also facilitate easier access to credit for MSMEs, promoting growth and employment in this vital segment of the economy.
However, despite these customer benefits, the banking sector faces several challenges. These include reduced profitability, rising credit risk, and potential inflationary pressures.
Banking sector analysts note that prolonged periods of low interest rates may compress banks' net interest margins, thereby affecting overall profitability.
Moreover, while increased lending may support economic activity, it could also lead to higher default rates if macroeconomic conditions fail to improve as expected. Although current inflation remains under control, analysts caution that sustained low rates could contribute to inflationary pressures over time if not managed carefully.