FILE PHOTO: FILE PHOTO: Reserve Bank of India (RBI) Governor Sanjay Malhotra
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HEMANSHI KAMANI
Even as the Reserve Bank of India ) on Friday delivered 25 basis points repo rate cut, banks are unlikely to cut term deposit and marginal cost of funds-based lending rate (MCLR) aggressively, senior bankers say. Tough competition for deposits and need to protect their net interest margins (NIM) are the key reasons for banks to maintain the interest rate at current levels, they say.
Says CS Setty, Chairman, State Bank of India, “It is a shallow rate cut of 25 bps, I don’t think banks will cut deposit rate aggressively. Credit growth is robust, every one of us will be looking for deposits. At the same time, 25 bps repo cut would have minimal impact on margins as the full benefit of 1 per cent CRR (cash reserve ratio) cut is available. Also, whatever reduction we had one year ago, fixed deposit will be re-priced at that rate. That benefit will also be available for banks.”
Another senior official at a public sector bank shared similar views, saying deposit rates are not likely to reduce commensurate to the repo cuts, given expectation of higher credit growth in H2FY26 and intense pricing competition, especially from small and mid-sized lenders.
Role of liquidity
Karthik Srinivasan, financial sector rating group head at ICRA Ratings, says cutting deposit rates will depend on the trajectory of credit growth. If it picks up, banks will face a challenge in cutting deposit rate. “A minor reduction could happen on certain tenures, but it would depend on entity to entity. Liquidity also plays a role in deciding deposit rates. We have seen banks lowering term deposit rates over the last 3-4 months. We are now nearing the end of Q3 and Q4 is generally a busy season for banks,” he said.
Banking system liquidity stood at an average surplus of ₹1.5 lakh crore for the period since October 2025, per RBI. In response to the cumulative 100 bps cut between February-October 2025, the weighted average lending rate (WALR) of banks declined by 69 bps for fresh rupee loans during, while WALR of outstanding rupee loans reduced by 63 bps. On the deposit side, the weighted average domestic term deposit rate (WADTDR) on fresh deposits has declined by 105 bps, while that on outstanding deposits has softened by 32 bps.
MCLR
According to Setty, MCLR is a formula-driven benchmark and unless banks’ cost of funds don’t reduce, MCLR does not get adjusted.
“While the 125-bps repo cut has led to re-pricing of repo linked loans faster, the deposits did not get re-priced as credit growth is coming back and there is higher competition to mobilise deposits. I don’t think we have been able to pass on full repo cut to deposits. This means that banks which have larger MCLR book, like us, their margins are still protected,” he said.
Harsh Dugar, ED, Federal Bank, says money market rates have remained aligned to policy repo rate, given easy liquidity conditions. “…A broad transmission of rates is expected to continue both in deposit and lending rates. The MPC has lowered the inflation forecast for FY26 by 60 bps to 2 per cent which may give the RBI room for a further cut in repo if warranted,” he said.
ICRA’s Srinivasan, meanwhile, says banks had to already reduce rates on repo or other external benchmark linked loans and going ahead, lenders who choose to maintain their margins will be cautious on cutting MCLR rates. “If at all a minor 5 bps reduction could happen by lenders, especially PSBs who have a higher share of MCLR-linked loans,” he said.
Published on December 9, 2025
