In its most forceful monetary policy move in nearly five years, the Reserve Bank of India (RBI) cut the repo ate by 50bps (basis points) to 5.5% in June 2025. This is the third consecutive reduction this year, bringing the cumulative rate cut to 100bps since February. With inflation easing to multi-year lows, the central bank is now firmly pivoting towards supporting economic growth.
RBI governor Sanjay Malhotra announced the decision following the three-day monetary policy committee (MPC) meeting. The 50-basis-point reduction is the steepest since the emergency cut of 75 basis points during the COVID-19 crisis in March 2020.
Source: RBI
Monetary Policy: From Tightening to Easing
RBI’s policy trajectory has shifted significantly since the pandemic. After cutting the repo rate from 4.4% to 4.0% in early 2020 to support the economy, the central bank held rates steady for nearly two years. Tightening began in May 2022, pushing the repo rate to 6.5% by February 2023 to combat inflation. With growth now moderating and inflation easing, RBI initiated rate cuts in February 2025, reducing the rate in three successive policy meetings.
The central bank continues to project India’s GDP growth for FY25-26 at 6.5%, despite challenges posed by global trade uncertainty. Retail inflation, meanwhile, has declined to 3.16% in April 2025—its lowest level in nearly six years—paving the way for a more accommodative monetary stance.
Key Policy Announcements
- Repo Rate: Reduced from 6.0% to 5.5%
- Standing Deposit Facility (SDF): Adjusted to 5.25%
- Marginal Standing Facility (MSF) and Bank Rate: Lowered to 5.75%
- Policy Stance: Shifted from 'accommodative' to 'neutral'
- Cash Reserve Ratio (CRR): To be reduced in phases from 4% to 3% (100 basis points), starting September 2025, potentially injecting 2.5 lakh crore into the banking system
In an additional liquidity-boosting measure, RBI announced a phased 100 basis point reduction in the cash reserve ratio (CRR) from 4% to 3%, to be implemented in four equal tranches of 25 bps each, starting September 2025. This move is expected to inject approximately Rs2.5 lakh crore into the banking system by November.
Impact on Banking Sector: The NIM Compression Challenge
The rate cuts present a complex bank dynamic, particularly regarding Net Interest Margins (NIMs = Interest earned on loans and investments – interest paid on deposits and borrowings) / average earning assets. When central banks reduce rates, banks typically face margin compression as loan yields decline faster than deposit costs.
Loan yields on floating-rate products (linked to external benchmark lending rate or MCLR) adjust quickly to rate changes, deposit rates, especially retail fixed deposits, tend to be ‘sticky’ due to competitive pressures. This creates a temporary squeeze on net interest margins. However, the impact varies significantly across banks. Institutions with higher current account savings account (CASA) ratios are better positioned to manage funding costs.
Meanwhile, banks with substantial floating-rate loan portfolios may experience quicker transmission but face near-term margin pressure. Industry commentary highlights that in the current low–rate environment, banks generally face a situation where “the advances book has a sizeable share of floating rate loans.” This means that rate cuts, while benefiting borrowers through lower EMIs, can also lead to margin compression if deposit rates do not fall as quickly. We have analysed some major banks in India.
ICICI Bank - ICICI Bank’s net interest margin (NIM) for the fourth quarter (Q4) of FY24-25 stands at 4.41%, a sequential increase from Q3 levels. The full-year NIM, however, moderates to 4.32%, reflecting pressure from rising deposit costs. The yield on advances for the quarter reached 9.86%, while the average cost of deposits rose to 5.00%, highlighting the lag in liability repricing relative to asset-side adjustments.
Approximately 53% of ICICI Bank’s domestic loans are benchmarked to the policy repo rate, enabling immediate transmission of rate changes on the asset side. The remaining portfolio is split between fixed-rate (31%) and MCLR or other benchmarks (15%). This structure allows partial insulation from immediate fluctuations but results in transitional NIM compression during easing cycles, where deposit repricing lags behind asset yield adjustments. Total domestic advances grew by 13.3% year-on-year, supported by growth in retail and SME segments. Business banking loans increased by 33.7%, while retail loans grew by 8.9%. Deposit growth remained stable, with total deposits rising by 14.0% and average deposits increasing by 11.4%. The CASA ratio stood at 41.8%, supporting the overall cost of funds.
The cost of deposits has risen due to increased competition and market rate adjustments. While some savings deposit rates and product-mix adjustments are underway, the complete transmission on the funding side remains gradual. Treasury operations are expected to partially offset the impact of lower asset yields during the rate cut cycle. Non-interest income grew by 18.4% sequentially, supported by fee income and subsidiary dividend contributions.
Operational cost efficiency was maintained, with the cost-to-income ratio declining to 38.6% for FY24-25. Core operating profit grew by 13.7% in Q4, and profit after tax increased by 18.0%. Asset quality remained stable, with the net NPA ratio at 0.39% as of 31 March 2025. The Bank has reduced its exposure to unsecured retail loans, constituting 10.5% of the retail portfolio, down from 11.8% in the previous quarter.
In response to the rate environment, the Bank is implementing deposit repricing strategies, rebalancing ALM positions and expanding fee-based income sources. These measures aim to manage the short-term compression in NIM and maintain earnings stability. Management commentary indicates awareness of transitional margin impacts due to the nature of interest rate transmission and ongoing focus on deposit mobilisation, cost control and income diversification to mitigate the effects of the policy rate trajectory.
HDFC Bank - As of March 2025, the overall advances under management were broadly categorised as 57% retail and 43% wholesale. According to the management, the full impact of the policy action in February 2025 will manifest in the April–June quarter (Q1FY25-26).
Despite the repricing of loans, HDFC Bank’s NIM remained stable at 3.46% in Q4FY24-25, underscoring its disciplined asset–liability management. The spread between yield on assets (about 8.3%–8.4%) and cost of funds (around 4.9%) remains resilient, reflecting a carefully orchestrated funding strategy.
While repo-linked loans adjust downward swiftly, deposit costs move more gradually, allowing the bank to preserve margin spread temporarily. This asymmetry in repricing has historically worked in favour of HDFC Bank during easing cycles.
On the funding side, the Bank continues to shift towards low-cost, stable retail deposits, with borrowings as a share of liabilities falling from 21% to 14%. Although the CASA ratio has moderated to the 34%–38 % range due to stronger growth in time deposits, management emphasised continued focus on granular deposit mobilisation and branch-led customer acquisition to preserve funding cost discipline. As such, the Bank appears to be absorbing the policy shift without significant erosion in profitability metrics, leveraging a balance sheet structure heavily skewed toward floating-rate assets and bolstered by deliberate liability optimisation.
HDFC Bank Chief Financial Officer (CFO) Srinivasan Vaidyanathan confirmed that a substantial portion of the Bank’s loan book, particularly mortgages and corporate loans, is linked to the policy rate and is repriced either immediately or within a month, ensuring swift transmission on the asset side.
Nearly 30% of the Bank’s advances, including mortgages, re-price within the immediate or following cycle, and most floating-rate products are expected to reflect the new rate environment within three months fully. However, fixed-rate segments such as vehicle and personal loans remain unaffected by policy shifts, as they are governed by a risk-based pricing model prioritising borrower profiles over monetary signal. Despite the rate cut, the Bank has resisted competitive pressure to lower rates in these segments.
State Bank of India - SBI’s margin dynamics in FY24-25 reveal a nuanced balancing act amid a softening rate environment. The whole Bank NIM declined modestly to 3.09% (down 19bps), while the domestic NIM stood at 3.22%, reflecting the initial pressure from the RBI’s recent repo rate cuts. However, the Bank's loan-mix moderates the complete transmission of policy easing into asset yields—only 29% of advances are directly repo-linked. The majority (around 50%) is tied to the MCLR or fixed-rate loans which reprice more gradually.
As highlighted by chairman CS Setty, this structural buffer provides a degree of insulation against abrupt margin compression, with rate transmission expected to be smoothed over successive quarters.
On the liability side, SBI continues to lean on its formidable deposit franchise which now stands at Rs53.82 lakh crore. While the CASA ratio has edged lower to about 41.1%—due to faster growth in term deposits (up 11.5%)—the Bank has maintained a tight grip on overall deposit costs. Notably, current account balances grew 27% y-o-y, reflecting SBI’s ongoing success in mobilising low-cost funds.
“There will be some quarters where we will have pressure on NIM, but we will readjust the deposit rates accordingly,” Mr Setty noted, emphasising the Bank’s intent to use ALCO (asset liability committee)-driven repricing to navigate funding cost pressures. Importantly, the savings rate will remain steady, preserving customer stickiness. Mitigation strategies also extend beyond core banking.
SBI’s management expects treasury gains to offer a cushion against interest income compression. At the same time, continued digital adoption—over 98% of transactions are now digital—and a lower cost-to-income ratio of 51.6% further bolster profitability. Meanwhile, strong asset quality metrics (gross NPA at 1.82%, net NPA at 0.47%) and stable credit costs (0.38%) point to effective risk management, even in a low-rate environment.
Kotak Mahindra Bank - Kotak Mahindra Bank has managed to preserve margin strength, despite emerging pressures from a lower interest rate regime, with Q4FY24-25 NIM rising sequentially to 4.97%. While the full-year margin declined 36bps to 4.96%—primarily reflecting higher funding costs and a recalibration of unsecured retail exposure—management remains constructive on the outlook. Strategic repricing of savings deposits and the compression of high-cost sweep products are already yielding results.
“We have reduced the fixed-rate savings account to as low as 2.75%,” CFO Devang Gheewalla noted, underscoring the Bank’s proactive stance in defending spreads.
Despite a challenging quarter impacted by legacy constraints, particularly the technology embargo affecting select digital products, deposit growth remained healthy at 16%. CASA balances held firm at 43%, underpinned by Kotak’s digital distribution, including the relaunched 811 platform. Notably, the share of current accounts has improved, helping offset pressure from rising term deposit rates. The Bank’s ability to sustain a favourable funding mix was critical in cushioning yield compression.
On the asset side, average advances grew 18%, with a deliberate shift away from unsecured retail loans (down from 11.8% to 10.5%) in favour of higher-quality portfolios. Management commentary suggests a significant share of the loan book is tied to floating benchmarks such as MCLR, where transmission of repo cuts tends to be staggered. This structural lag and aggressive deposit repricing positions the bank to absorb rate cuts without immediate NIM erosion.
Beyond margin management, Kotak’s broader strategy emphasises diversification and operational leverage. Non-interest income is expanding via capital markets, asset management, and fee-based services, while continued investment in digital infrastructure is expected to bring down cost-to-income ratios. Meanwhile, robust asset quality—with a Net NPA at just 0.31%—and a yearly increase in book value per share of 21% reflect a capital-efficient growth strategy. The management’s tone is confident, yet pragmatic. While acknowledging macro risks and possible further rate adjustments, CEO Ashok Vaswani emphasises a transformation agenda centred on deepening customer engagement and enhancing cross-selling opportunities.
Winners in the Banking Ecosystem
- Non-banking financial companies (NBFCs) like Bajaj Finance, Shriram Finance, Cholamandalam Investment & Finance, Muthoot Finance and L&T are likely to benefit significantly as their cost of funds decreases while spreads potentially expand
- Retail-focused banks may see improved credit growth offsetting initial margin compression
- Housing finance companies stand to gain from increased mortgage demand
Borrower Benefits: EMI Relief across Segments
The rate cuts translate directly into tangible benefits for borrowers across various segments. With most banks adjusting their repo-linked lending rates following previous cuts, borrowers can expect further EMI reductions.
Impact on Different Loan Categories:
- Home Loans: EMIs are expected to decrease further, with some banks offering sub-7% rates. RBI has already reduced interest rate twice in 2025, leading to a dip in home loan interest rates to below 8% — the lowest since 2022. This presents a valuable opportunity for homebuyers and homeowners, as it reduces interest outflows and enhances loan affordability. According to data compiled by BankBazaar, several banks and financial institutions now offer home loans at competitive interest rates, ranging from 7.5% to 10%. Historically, public sector banks (PSBs) have transmitted a significant portion of repo rate cuts, and NBFCs often widen spreads or delay complete transmission due to higher funding costs. The potential decline in home loan rates post the 50bps repo rate cut is estimated below, considering best-case (full transmission) and likely scenarios (partial transmission of 25-40 bps):
Representative purpose only – Actual rates may differ widely
- Auto Loans: Lower financing costs could boost vehicle demand, particularly in rural markets
- Personal Loans: Reduced borrowing costs may stimulate consumer spending
- Corporate Lending: Cheaper working capital and term loans support business expansion
The cumulative 100bps reduction since February 2025 has already provided substantial relief to borrowers, with the latest 50 basis point cut expected further to stimulate credit demand across retail and MSME segments.
Fixed Deposit Impact: Savers Face Lower Returns
While borrowers celebrate lower EMIs, fixed deposit investors face the downside of the rate-cutting cycle. By the end of April 2025, many banks will have already cut their interest rates for domestic deposits below Rs3 crore by around 25-50 basis points for regular and senior citizen depositors.
Implications for Different Investor Categories:
- Senior Citizens: Face significant income pressure as FD rates fall below inflation
- Conservative Investors: May need to explore alternative investment avenues
- Institutional Investors: Likely to shift toward equity and hybrid products
The decline in deposit rates is expected to continue as banks adjust their liability pricing in response to the repo rate cuts. This trend may accelerate the flow of funds from traditional savings instruments to equity markets and mutual funds.
Sectoral Impact: Winners and Challenges
Rate-Sensitive Sectors Set to Benefit:
- Real Estate: Lower home loan rates are expected to boost demand, particularly in affordable and mid-income housing segments
- Automotive: Cheaper auto financing could drive sales recovery, especially in two-wheelers and passenger vehicles
- Infrastructure and Capital Goods: Reduced borrowing costs support capex-heavy companies
- Consumer Durables: EMI-driven purchases are likely to increase
Sectors Facing Headwinds:
- Banking (short-term): Margin compression may weigh on profitability
- Insurance: Lower investment yields could impact returns
Market Implications: Liquidity and Valuation Impact
The rate cuts are expected to have significant implications for financial markets. Lower rates typically reduce bond yields, making equities more attractive relative to fixed-income instruments. The additional liquidity injection through the CRR further supports market sentiment.
Equity Market Dynamics:
- Valuation re-rating likely in interest-sensitive sectors
- Increased foreign investor interest due to higher relative returns
- Rotation from fixed-income to equity investments
Learning from Past Cycles
The current rate-cutting cycle parallels the aggressive easing during COVID-19, when RBI reduced rates from 5.15% to 4.0% between February and May 2020. The 2020-21 experience provides insights into potential outcomes:
- NBFCs and housing finance companies emerged as clear winners
- Real estate and automotive sectors saw a strong demand revival
- Banking sector faced initial NIM pressure but benefited from improved credit growth
- Fixed-income investors migrated to equity markets, boosting AUMs
Governor Malhotra's indication of a shift to a 'neutral' stance suggests a more calibrated approach in the future. With limited space for further aggressive cuts, the RBI will likely focus on data-dependent policy making, balancing growth support with inflation monitoring.
Key Factors to Watch:
- Monsoon performance and its impact on food inflation
- Global trade policy developments and their domestic implications
- Corporate credit demand and capacity utilisation trends
- Currency stability amid foreign investment flows
RBI's aggressive rate-cutting cycle reflects a decisive shift toward growth support as inflation concerns recede. While the immediate beneficiaries include borrowers and rate-sensitive sectors, the broader economic impact will depend on how effectively the transmission mechanism works and whether the intended growth stimulus materialises.
The current environment presents both opportunities and challenges for investors and market participants. The rate cuts create a favourable backdrop for credit growth and economic expansion, but also necessitate portfolio adjustments to navigate the changing interest rate landscape.
As India navigates global uncertainties and domestic growth aspirations, RBI's monetary policy will remain critical in maintaining the delicate balance between supporting growth and ensuring macroeconomic stability. The success of this policy shift will, ultimately, be measured by its ability to translate lower rates into sustained economic momentum, while keeping inflation within the target range.
