RBI’s 50 bps Jolt Triggers Lending Rate Reset; Borrowers Stand to Gain, But With a Caveat

Mumbai | June 9. India’s biggest lenders are scrambling to reset lending rates after the Reserve Bank of India stunned markets with a 50 basis point repo rate cut on Friday, alongside a surprise 100 bps reduction in the Cash Reserve Ratio (CRR). But while the headlines favour borrowers, the fine print tells a more nuanced story.

The policy action, which brings the repo rate down to 5.5%, aims to revive consumption and credit demand in an economy still adjusting to post-pandemic structural drags and weak private investment. The CRR cut is designed to inject an estimated ₹2.5 lakh crore of additional liquidity into the banking system—freeing up capital for lending.

Public banks move fast, private players tread cautiously

Among the first movers, Bank of Baroda (BoB) slashed its Repo Linked Lending Rate (RLLR) by the full 50 bps to 8.15%, effective June 7. Punjab National Bank (PNB) followed, cutting its RLLR to 8.35%. Bank of India, UCO Bank, and Central Bank of India also matched the central bank’s cut, easing their RLLRs by similar margins.

In contrast, private sector majors have opted for modest adjustments. HDFC Bank pared its Marginal Cost of Funds-based Lending Rate (MCLR) by just 10 basis points across tenures. Its revised one-year MCLR now stands at 9.05%. While this may seem underwhelming, the reason lies in how banks benchmark different loan categories—floating rate loans are typically linked to external benchmarks like the repo, while fixed-rate or MCLR-linked loans adjust more slowly and selectively.

Not all borrowers benefit equally

While repo-linked home loans see near-instant resets, the benefit for new borrowers is tempered by widening spreads. Banks, wary of margin compression in a high-liquidity, low-credit-demand environment, are adjusting the markup over the repo rate. So even as benchmark rates fall, the effective rate for new borrowers may not decline as sharply.

Old borrowers, on the other hand, are in a better position. Their loans—especially those linked to the external benchmark—will automatically realign with the reduced repo rate, assuming the reset date is due. For them, EMIs could drop in the coming months, freeing up disposable income.

FD savers, brace for a cut

Banks’ eagerness to defend their net interest margins also signals a likely reduction in deposit rates in the near term. With fresh liquidity flooding the system thanks to the CRR cut, the urgency to attract retail deposits has eased. That may spell bad news for savers, particularly senior citizens who rely on fixed-income products.

Already, the yield curve is flattening at the shorter end. A few banks have trimmed deposit rates on tenures under one year, and more are expected to follow, especially if credit offtake doesn’t materially improve.

A race for market share?

In the ultra-competitive home loan market, many lenders had already undercut larger players to gain share. Rates as low as 7.85% for home loans up to ₹30 lakh were being offered by banks like Bank of Maharashtra, Union Bank of India, and Indian Overseas Bank, even before the rate cut.

Private players like South Indian Bank, Karur Vysya Bank, and PNB Housing Finance had positioned themselves aggressively too. The latest RBI action may now trigger a fresh wave of rate wars—not just among PSU banks but between niche players and the big private names.

What happens next?

The central bank’s intent is clear: revive credit and push the economy toward a durable growth trajectory. Whether the transmission of rate cuts will be smooth and wide enough is another question. Banks continue to operate in a landscape marked by tight spreads, sluggish loan demand from corporates, and rising pressure on savings mobilization.

In the near term, the benefits will skew toward retail borrowers with repo-linked loans and smaller ticket sizes. But for new borrowers, especially those eyeing longer-tenure loans or fixed-rate products, a detailed comparison of effective lending rates—including spreads, reset frequencies, and loan conditions—will be essential.

As monetary policy shifts gears and liquidity deepens, banks will need to balance growth ambitions with profitability. Borrowers, meanwhile, may be wise to act quickly before the spreads start creeping up again.