Monthly RBI bulletin: Public-sector banks slashed rates more than pvt peers

RBI report says PSBs reduced lending and deposit rates more than private banks in response to 100-bps repo rate cut; economy stays resilient amid global uncertainty

Following the 100 basis points (bps) cut in the policy repo rate since February this year, India’s public-sector banks have lowered their lending and deposit rates more than their private-sector counterparts, data released by the Reserve Bank of India on Wednesday showed. 

The decline in the weighted average lending rates of fresh rupee loans by the public sector banks was 31 bps till May, while that for private banks was 20 bps. Foreign banks saw a sharper decline of 49 bps (See table). For fresh deposits, the interest rates offered by PSBs fell 47 bps as compared to 41 bps by private banks. 

 

The six member rate setting panel has cut the policy repo rate by 50 bps between February and May. In June, the rate was further reduced by 50 bps. One bp equals 0.01 per cent. 

 “During the current easing cycle (February-May 2025), the decline in weighted average lending rates on both fresh and outstanding rupee loans was higher for Public Sector Banks (PSBs) as compared to Private Sector Banks (PVBs),” an article on the state of the economy in RBI’s July bulletin said. 

“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 100 bps and marginal cost of funds-based lending rate by 10 bps,” it said. 

 

Consequently, the weighted average lending rates on fresh and outstanding rupee loans of scheduled commercial banks declined by 26 bps (domestic banks - 24 bps) and 18 bps (domestic banks - 16 bps), respectively, during February-May 2025.

 

However, average bank credit growth continued to moderate across key sectors of the economy in May 2025, the article noted. Bank credit to NBFCs contracted in May 2025 as they raised a significant amount of debt from the capital markets via private placements, it noted.

 

“While overall credit to the industrial sector recorded a subdued growth due to a decline in credit growth to infrastructure, credit to the MSME sector continued to remain buoyant,” the Bulletin said. The article also highlighted a “sharp deceleration” in personal loans, the main driver of banks’ credit growth, and largely attributed this to a decline in other personal loans, vehicle loans and credit card outstanding.

 

“System liquidity remained in surplus to facilitate a faster transmission of policy rate cuts to the credit markets,” the article pointed out. The report further observed that banks have been reducing their savings bank account deposits and rates on such deposits of some of the state-run banks are at all-time low.

 

“Banks have also reduced their rates on savings deposit. Currently, the savings deposit rates of some PSBs are prevailing at a historical low, since their de-regulation in 2011,” the report said. State Bank of India, the country’s largest lender, and HDFC Bank, the second largest player, offer 2.5 per cent on savings account deposits.

 

While observing that the rates on small savings schemes were kept unchanged by the government during the second quarter of the current financial year, the bulletin noted that “the prevailing rates on these instruments are higher than the formula-based rates by 33-118 bps.” The July-September quarter is the sixth successive quarter that a status quo has been maintained on these rates. 

 

The domestic economy stayed largely resilient, supported by strong fundamentals, with lower inflation, and farm sector prospects propping up aggregate demand, the article noted. While industrial activity recorded modest growth in June, growth in rural demand remained resilient and was accompanied by a recovery in urban economic activity.

 

“Amidst global economic uncertainties, the front-loading of spending by the central and state governments, with a focus on higher capex, is helping to offset some slowdown witnessed in private capex expenditure,” the article’s authors reckoned.

 

“Easing inflation, improving kharif season prospects, front-loading of government expenditure, targeted fiscal measures and congenial financial conditions for faster transmission of rate reductions should support aggregate demand in the economy, going forward,” it noted.

 

The article observed that the financial markets seem to have taken trade policy uncertainties in their stride, possibly reflecting optimism on reaching trade deals that are less disruptive to the global economy. “Even so, underpricing of macroeconomic risk by financial markets remains a concern. The average trade tariff rates are set to touch levels unseen since the 1930s,” it said.

 

The article mooted building more resilient trade partnerships as it presents a strategic opportunity for India to deepen its integration with global value chains.

 

“In addition, measures to accelerate domestic investment in infrastructure and structural reforms aimed at improving competitiveness and productivity would build resilience while supporting the growth momentum,” the report added. 

 

The article was authored by RBI staffers under the guidance of Poonam Gupta, deputy governor, RBI. Views expressed in the report are that of the authors and not that of the central bank, it was clarified.