In the current policy rate easing cycle, which started in February this year, public sector banks (PSBs) have slashed their lending and deposit rates more sharply than their private sector counterparts, according to an RBI article.
The savings deposit rates of some PSBs are prevailing at a historical low, since their deregulation in 2011, the ‘State of Economy’ article published in the RBI’s July bulletin said.
The RBI article talks about reduction in weighted average lending and deposit rates on fresh and outstanding rupee loans and deposits by banks between February and May 2025, when the repo rate was slashed by 50 basis points (bps) by the Reserve Bank of India’s (RBI) six-member Monetary Policy Committee (MPC).
Between February and May 2025, PSBs reduced their weighted average lending rates on both fresh and outstanding rupee loans by 31 bps and 17 bps, respectively. In comparison, private banks have lowered these rates by 20 bps and 15 bps, respectively, during the same period, the article said.
The reduction in the weighted average lending rates on fresh and outstanding rupee loans by foreign banks was 49 bps and 52 bps, respectively, during the four months under consideration.
On the deposit side, the weighted average domestic term deposit rates for fresh deposits declined significantly for both PSBs and private lenders. On fresh deposits, public sector banks lowered their interest rates offered by 47 bps, while private banks reduced their rates by 41 bps.
However, state-run banks cut their weighted average domestic term deposit rates on outstanding deposits by 3 bps points, compared to an increase of 5 bps by private lenders.
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The RBI’s monetary policy committee (MPC) has cut the repo rate –- the key policy rate — by 100 bps between February-June 2025. The repo rate was reduced by 25 bps each in the February and April monetary policy meetings, and by 50 bps in the June policy meeting. The repo rate currently stands at 5.5 per cent.
In response to the 100-bps reduction in the policy repo rate since February 2025, banks have adjusted their repo-linked external benchmark based lending rates downward by a similar margin and the marginal cost of funds-based lending rate (MCLR) by 10 bps, according to the RBI article.
“Consequently, the weighted average lending rates on fresh and outstanding rupee loans of scheduled commercial banks declined by 26 bps (24 bps for domestic banks) and 18 bps (16 bps for domestic banks), respectively, during February-May 2025,” the RBI article said.
Despite a reduction in the repo rate by 50 bps between February and May 2025, credit growth has remained muted. At the end of May 2025, growth in non-food bank credit eased to 9.8 per cent, from 12 per cent in February 2025. Credit flows to all sectors moderated on a year-on-year basis during May 2025 compared to April 2025, the article said.
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