RBI Reduces Repo Rate By 50 BPs, But The Question Is: When Will Banks Pass On The Benefit?

The cash reserve ratio (CRR) has also been cut by 100 basis points, to 3 per cent from earlier 4 per cent. This CRR cut is estimated to pump in additional Rs 2.5 lakh crore into the financial system.

The focus is now on banks, which ultimately need to take the necessary steps and pass on the benefit to the end customer and corporations. Until banks reduce their borrowing cost, there will little impact on the broader economy.

The larger than expected quantum of reduction, however, has brought much cheer to the industry.

"I shall now briefly set out the rationale for these decisions. Inflation has softened significantly over the last six months, from above the tolerance band in October 2024 to well below the target," Sanjay Malhotra, RBI governor said.

While the State Bank of India had projected a 50 basis points slash in repo rate, most other analysts had anticipated a 25 basis points reduction by the RBI’s rate setting panel.

The cumulative rate cut over the cycle has been 100 basis points so far.

What has surprised many is RBI's change in stance from accomodative to neutral, marking an end to ending the policy cycle. 

"In the near term, rate sensitive sectors such as banks real estate and auto will benefit," Aamar Deo Singh, Senior Vice President-Research, Angel One said in a statement.

Demand For Bank Credit Slowing

Demand for bank credit has been slowing in the last few months. It fell to a single-digit growth of 9.8 per cent as of mid-May, from 19.5 per cent during the corresponding period in the previous year, 

RBI data showed that credit to industry too has somewhat slowed down. The central bank has already taken steps to ease the liquidity shortage but it needs to continuously monitor the situation.

“Recent RBI measures have turned liquidity deficits into surpluses, but ongoing support is needed to enable timely project completion and new launches, particularly for smaller players and in capital-intensive segments like warehousing and hospitality,” Anuj Puri, Chairman, Anarock Group which is into real estate said.

The micro small and medium enterprises (MSMEs) for instance have had little respite and banks continue to be wary in giving them credit. This sector has been hit by acute cash crunch. This has forced many units to shut down. "Banks are not keen to give loans to MSMEs, which often fail to provide collaterals. They prefer large companies," a public sector bank official admitted.

"We need to change this trend and steps are essential to ensure that credit is not choked to the smaller firms. While there is fear of default, there is no reason why banks should avoid offering credit to these firms. The list of wilful defaulters comprise big companies," CH Venkatachalam, All India Bank Employees Association (AIBEA) said.  

Inflation Cools

The cooling of retail inflation—in April this year it stood at 3.16 per cent—the lowest since July 2019 and well below RBI’s inflation target of 4 per cent. This has given the RBI the much required elbow room to reduce interest rates and focus on economic growth. Expectations of a normal monsoon this year have also come as a relief to policymakers.

Emkay Financial Services in its report said that barring the perishables and vegetable food price vagaries, there appears limited upside risk to near-term inflation. “Global geopolitical and trade and supply chain disruptions may not necessarily prove net inflationary for India,” it said.

Naturally this will help RBI to focus on growth.

“If Inflation is not a concern, the RBI would naturally focus on growth but until banks cut interest rates, it has limited implications,” an industry captain who did not wish to be quoted saidIndia clocked a GDP growth of 6.5 per cent in 2024-25. The RBI also announced the highest ever dividend of Rs 2.7 lakh crore for 2025-26. This will help boost growth in the current fiscal year.