Market landscape dynamics shaping the bond market sector
RBI Rate Cut Boosts Loan and Deposit Transmission
The Reserve Bank of India (RBI) has been actively managing short-term rates while supporting broader transmission through its variable rate reverse repo (VRRR) operations. This strategy has led to a noticeable transmission effect on various loan, deposit, and savings interest rates across India.
Since the RBI's June 2025 rate cut of 50 basis points to a 5.50% policy repo rate, banks have started to reduce lending rates, particularly affecting home loans which have dropped below 8% in many cases, enhancing affordability for borrowers. Simultaneously, banks have also cut interest rates on savings deposits and wholesale funding instruments like certificates of deposit (CDs), with 12-month CD rates declining by over 1.75%, reflecting lower costs for banks on deposits and thus a reduction in the interest they pay to depositors.
The transmission chain operates as follows: the RBI’s policy rate cut lowers the benchmark for banks' funding costs, encouraging them to reduce lending rates to stimulate credit growth, especially to sectors like housing and MSMEs facing growth headwinds due to international tariff uncertainties. The transmission is somewhat delayed and incomplete, as some banks’ loan rates adjust at different paces, but the overall trend is toward cheaper borrowing costs. Deposit rates fall as well, although typically lagging loan rate changes, since banks balance attracting deposits with managing margin pressures.
Moreover, the drop in the policy rate is underpinned by steady inflation running below 4%, including a notable 2.1% CPI reading in June and a forecasted further drop to 1.5% in July, giving the RBI room to maintain accommodative monetary policy without stoking inflationary pressures. This environment supports continued lowering of interest rates on loans and deposits.
Public, private, and foreign banks have all cut their deposit rates, with public sector banks offering historically low returns. SBI, HDFC Bank, and ICICI Bank currently offer just 2.5%. Smaller banks like Yes Bank, Suryoday Bank, and IDFC First Bank offer relatively higher savings rates, ranging from 2.5 to 7.75% depending on the account balance.
While banks have passed on the 100 basis point cut to external benchmark-linked lending rates, the marginal cost of funds-based lending rate has dropped by 10 basis points. However, 10-year AAA-rated corporate bond yields rose from 6.9% to 7.2% over the same period. The 10-year G-sec yield has climbed from 6.25% in May to 6.37% by the end of July. The term spread between 10-year G-secs and 91-day T-bills widened by 30 basis points, indicating a steeper yield curve.
Short-duration strategies, such as low-duration and money market funds, have registered only a marginal decline in returns. The 91-day T-bill yield has declined from 5.6% to 5.4%, and 3-month certificates of deposit and commercial paper yields have dropped by around 30 basis points.
The RBI shifted to a neutral stance in June, signalling that the bulk of rate cuts may be behind us. However, the ongoing transmission of the rate cut is influenced by factors like RBI's future guidance, global trade uncertainties, and banks’ internal funding and risk considerations.
In summary, post the RBI's June 2025 rate cut, loan rates, particularly home loans and personal loans, have declined, with home loan interest rates in many banks falling below 8%. Deposit and savings interest rates have also decreased, with banks cutting savings account rates and wholesale funding costs reflected in CD rates dropping by more than 1.75%. The transmission is ongoing but influenced by various factors, supporting credit expansion in the economy by making borrowing cheaper while lowering the returns on deposits correspondingly, consistent with the RBI’s accommodative stance amid low inflation.
- The Reserve Bank of India's (RBI) rate cut in June 2025 not only affects loan and deposit rates, but also impacts various sectors like home loans, personal loans, and savings accounts.
- With the 50 basis points reduction in the policy repo rate, banks have started to lower their lending rates, particularly affecting home loans and personal loans, thereby improving affordability for borrowers.
- Banks have also lowered the interest rates on savings deposits and wholesale funding instruments like certificates of deposit (CDs), which in turn reduces the interest they pay to depositors.
- The RBI's accommodative monetary policy, supported by steady inflation and a stable neutral stance, continues to support the transmission of lower interest rates on loans and deposits, thereby promoting credit expansion in the economy.
