Despite RBI rate cut, banks find it difficult to pass benefits to customers, say experts

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26 Aug, 2025 12:21

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While the Reserve Bank of India (RBI) has delivered a second consecutive policy rate cut, taking the cumulative reduction to 50 basis points since February, lack of guidance on liquidity support may keep lenders from passing on the entire benefit to customers.

Experts said that tight liquidity conditions are likely to keep banks' cost of funds elevated, limiting their ability to cut lending rates.

A senior official at Bank of India said that the lender will look at cutting some deposit rates and lending rates next week when the asset-liability committee meets. "There may be reduction in rates...though only to some extent," the official said. In March, the lender had cut its one-year marginal cost-based lending rate (MCLR) by five basis points, while other tenors were left unchanged.

Bank of Maharashtra reduced its MCLR by only five basis points across tenors, effective April 7. It's one-year MCLR has been reduced from 8.75 percent to 8.70 percent.

State Bank of India (SBI) has decided to link its deposit rates and short term lending rates to RBI's policy rate as the external benchmark from May 1, hence it's rates will automatically adjust to the reduction. SBI's savings deposit rate on balances above Rs 1 lakh, which is at 3.5 percent, will fall to 3.25 percent. The bank has fixed a spread of 2.75 percent for savings bank rate and 2.25 percent on short-term loans rate.

In response to the February policy rate cut, a number of other lenders like ICICI Bank, Kotak Mahindra Bank, HDFC Bank, Bank of Baroda, Punjab National Bank, YES Bank and Union Bank of India had reduced MCLR in select tenors by 5 to 15 basis points.

On April 3, RBI Governor Shaktikanta Das said "more needs to be done" in terms of monetary policy transmission. The central bank is working with lenders to come up with an effective way to ensure faster transmission, he said.

In terms of providing liquidity support, the RBI said it will use all tools including the newly-introduced dollar-rupee swap, to maintain adequate liquidity in the system.

"Rate cuts are more effective when liquidity is positive – therefore, the operating theme could be to move to a durable positive liquidity which could by itself mark a step towards a more accommodative stance," said RK Gurumurthy, Head Treasury, Lakshmi Vilas Bank.

"RBI rate cuts, along with sufficient durable liquidity, should speed policy transmission to lending rate cuts, as the slack industrial season begins," said Indranil Sengupta, India economist, Bank of America Merrill Lynch. He expects RBI to inject $2-3 billion a month through open market purchases of government bonds or forex intervention for the June quarter.

"After all, Re 1 of RBI liquidity takes about 6 months to 'multiply' into Rs 5 of deposits. That said, the effective 2 percent SLR cut is a negative as it will hold up the risk-free rate. Finally, our liquidity model suggests that the money market is unlikely slip to reverse repo mode now given high cash demand during the elections," he added.