Repo rate fell, but loans stayed costly: How RBI rate cuts have been lost in transmission so far

The uneven transmission reflects the cautious behaviour of the banks: while stronger domestic demand and GST rate rationalization could support lending, pressures to protect deposits and subdued investment appetite amid global headwinds mean banks will be in no hurry to slash rates sharply.

Skewed signals

Data highlights the familiar asymmetry in monetary transmission: deposit rates tend to adjust faster and more fully, while lending rates move slowly and partially. Between February and July, against a cumulative cut of 100 basis points (bps), lending rates fell by 53 bps and deposit rates by 101 bps.

The 2019-22 easing phase, driven by pandemic-related shocks, saw lending rates drop 232 bps (93%) and deposit rates 259 bps (104%), nearly mirroring the 250 bps cut, as weak credit demand and precautionary savings produced an unusually strong pass-through.

Meanwhile, in the 2022-25 tightening phase, a 250 bps repo hike saw deposit rates rise by 259 bps, an effective pass-through of over 100%, while lending rates increased by a smaller 181 bps, or roughly 72%, cushioning savers.

For borrowers, this asymmetry means limited relief when policy rates fall, as lending costs decline only gradually. For savers, returns on deposits adjust faster, boosting income during a hike cycle but also leading to a quick erosion when rates are cut.

Rate contrast

Foreign banks have cut lending rates on fresh rupee loans by a steep 104 bps, compared with 46 bps by public sector banks and 62 bps by private banks. The sharper transmission by foreign banks reflects their smaller, urban-focused loan books dominated by floating-rate credit and their reliance on wholesale deposits, both of which can be repriced quickly.

Public sector banks, by contrast, carry large portfolios of long-tenure and fixed-rate loans, which slow the pass-through of repo changes. Their dependence on retail deposits, often locked in at fixed rates, further constrains adjustments. Private banks, with a mix of corporate and retail lending, fall in between: more cautious than foreign banks in reducing rates but quicker than public banks when competition tightens.

Deposits, however, tell a different story. Foreign banks have cut fresh deposit rates by 97 bps, while public and private banks have reduced rates by 100 bps and 99 bps, respectively, reflecting their need to protect margins while managing a broad retail deposit base.

Cash comfort

Commercial banks are sitting on higher reserves, with net balances more than doubling in the first half of 2025. Reserves rose from ₹7.1 trillion in January to ₹13 trillion by July. Balances maintained with the RBI remained broadly steady at ₹8.9-9.5 trillion during this period, while cash in hand also stayed stable at ₹0.8-0.9 trillion.

The sharp shift was seen in borrowings from the central bank. Loans and advances that stood at ₹2.6 trillion in January turned negative by June, reflecting banks’ move from drawing on RBI liquidity to placing surplus funds with it.

The accumulation of reserves indicates that liquidity is not a constraint in the current environment. In principle, banks have the space to transmit recent policy rate cuts more decisively to borrowers. Yet, they remain cautious, refraining from undertaking large reductions in lending rates.

Ratio riddle

Despite banks sharply reducing deposit rates, deposits have expanded steadily in recent months. Aggregate deposits rose from ₹217.7 trillion in January to ₹230.54 trillion in July, while bank credit increased from ₹174.3 trillion to ₹185 trillion over the same period.

The surge in deposits despite lower returns suggests savers’ stronger preference for bank deposits compared to other investment avenues. This marks a notable shift from past trends, when aggressive deposit rate cuts typically dampened inflows. The shifting dynamics have had a direct bearing on the credit-deposit ratio, a critical gauge of how effectively banks are deploying resources into lending.

In January-March, banks extended credit worth nearly 80 paise for every rupee of deposits. Since April, however, the ratio has softened, slipping to 78.9% and further to 78.4% in May. The latest numbers for June and July show a slight uptick to 79.9% and 80.3%, respectively.

However, whether this rebound signals a lasting revival in credit demand or merely a passing blip amid abundant liquidity remains to be seen.

Tamed spirits

Is the recent rate cut reviving private investment?

For years, muted private capex has been the Achilles’ heel of the Indian economy. Even as corporate profits soared, companies held back on fresh spending, with capacity utilization in RBI’s survey of manufacturing enterprises stuck near 75%, much below the 80-85% threshold that typically sparks new projects.

The last quarter of 2024-25 showed some tentative signs of recovery, but momentum appears fragile. A recent survey of firms across manufacturing, agriculture and services by the State Bank of India (SBI) pegs intended private capex for 2025-26 at just ₹4.9 trillion, sharply down from ₹6.6 trillion in 2024-25.

The outlook is clouded further by US tariffs, which could dampen investment plans. With risk appetite subdued and demand visibility weak, surplus funds continue to find their way into bank deposits rather than new projects. Policymakers, however, are betting on GST 2.0 to stoke a fresh demand cycle, revive animal spirits, and nudge banks into passing on more of the rate cut benefits to borrowers.

Puneet Kumar Arora is an assistant professor of economics at Delhi Technological University. Jaydeep Mukherjee is a professor of economics at Shiv Nadar University, Chennai.