Faster transmission of RBI rate cut expected this time

New Delhi: The Reserve Bank of India’s surprise 50 basis points (bps) cut in policy repo rate is expected to lead to a faster transmission with a significant reduction in interests on fixed deposits (FDs) as well as on lending, especially new housing and auto loans, experts said.

Fixed deposit rates have been reduced in the range of 30-70 bps since February 2025. “Transmission to deposits rates is expected to be strong in the coming quarters with further rate cut in deposits expected from banks,” SBI Group Chief Economic Adviser Soumya Kanti Ghosh said in a note.

The RBI has cut key policy rates thrice since February. It started the rate cut cycle with 25 basis points reduction in February. The key policy rates were reduced again by 25 bps in April. However, in its second bi-monthly policy review of the current financial year last week the RBI surprised people with a jumbo 50 bps cut.

The cumulative reduction in the repo rates now stands at 100 bps (1%) since February. Repo rate is the interest at which the RBI lends money to commercial banks for short-term needs. The reduction in repo rate will lower the cost of borrowings for banks. This could be passed down reducing interests charged on housing, auto and other loans.

 “Variance decomposition analysis using a VAR (Vector Autoregression) indicates strong transmission of monetary policy from the repo rate to the loan rate on outstanding loans in coming quarters,” SBI Research said.

Managing Director of LIC Housing Finance Tribhuwan Adhikari said the repo rate cut is expected to significantly lower borrowing costs, thereby improving affordability for homebuyers across segments.

“This move by the RBI will likely catalyse a surge in home loan demand, especially the affordable housing segment. We expect a good boost in the housing demand from July onwards, and are optimistic that this year will be good for the housing finance industry,” Adhikari said.

A 50-bps reduction in interest rate on a Rs 50 lakh home loan of 20-year tenure would lead to a monthly saving of around Rs 2,000. Home loan borrowers can either reduce their Equated Monthly Installments (EMIs) or reduce the length of the tenure.

While banks have traditionally been swift in hiking lending rates when repo rates increase, transmission in the case of rate cuts are sluggish. Liabilities on fixed deposits, according to analysts, remain a key issue in transmission of rate cuts. Despite the rate cut, banks carry liabilities on fixed deposits for a specified period. 

Frontloading of rate cuts along with reduction in cash reserve ratio (CRR), would lead to better transmission of rate cuts this time than in the past cycles, RBI Governor Sanjay Malhotra said during the post-monetary policy press conference.

Another issue is related to the transmission of rate cuts in lending vs deposit rates. As per the RBI data, the average deposit rates have declined by 27 bps since the February rate cut cycle, while lending rates on outstanding credit have come down by only 17 bps. 

“The transmission of policy rates holds primary importance for the easing to be percolated to the economy as intended by the central bank,” said Paras Jasrai, Associate Director, India Ratings and Research.  

According to an SBI Research analysis, following the RBI’s repo rate cut by 50 bps (combined) in February and April, majority of the lenders reduced their external benchmark-based lending rates (EBLRs) by a similar magnitude. Major lenders that lowered interests on FDs following the RBI policy rate cut in February and April include State Bank of India, HDFC Bank and ICICI Bank.

Following the February and April policy rate cut, some banks also reduced interest rates on savings accounts. With the new cuts interests on savings and deposit accounts are likely to fall further.