RBI’s Rate Cut to Boost Lending and Liquidity, But Margin Pressures Remain: SBI & Union Bank Reports


Lending Rates to Fall by 30 bps: SBI Report

According to the latest report by the State Bank of India (SBI), lending rates are expected to decline by 30 basis points (bps) following the RBI's recent policy rate cut. The reduction in the repo rate by 50 bps to 5.5% and the 100 bps CRR cut to 3% is anticipated to have a swift and visible impact on loans linked to the External Benchmark Lending Rate (EBLR). Notably, EBLR-linked loans constitute about 60% of the total loan book of All Scheduled Commercial Banks (ASCBs).

The report states, "The steep cut on policy rates is expected to pass on to the EBLR-linked loan book immediately, with ASCBs' share of 60 per cent. Thus, the immediate impact on the average lending rate could be around 30 bps."

Impact on Borrowing Costs and Bank Margins

The SBI report explains that this rate cut will lower borrowing costs for retail and corporate customers, thereby stimulating credit demand. However, it also warns of a possible decline in Net Interest Margins (NIMs) due to the faster transmission of lower rates to lending portfolios.

To counteract the pressure on bank profitability, the RBI’s CRR cut is expected to play a crucial role. Although the reduction in CRR may not mathematically alter deposit or lending rates immediately, it is likely to bring down the cost of funds for banks. This could translate into a 3–5 basis point improvement in NIMs, offering banks some cushion against the earnings impact of lower lending rates.

Furthermore, the CRR cut will reduce base money (M0) in the system, thereby enhancing the money multiplier by 20–30 bps, which in turn will support overall system liquidity.

FD Rates Already on the Decline

In a notable trend, fixed deposit (FD) rates have already started to decline. Since February 2025, FD rates have been reduced by 30 to 70 bps, and the report anticipates further cuts in the coming months as banks adjust to the changing monetary environment.

This continued decline in deposit rates aligns with historical patterns, where policy rate cuts often result in margin compression for banks. While the extent of impact will vary among individual banks, SBI expects a general downward pressure on margins to persist in the short term.

Union Bank: Rate Cut Cycle Likely Concludes Here

A complementary report by Union Bank of India suggests that the current rate cut marks the end of the ongoing easing cycle. According to the bank, the terminal repo rate is likely to settle at 5.50%, based on a real interest rate of 150 bps and an inflation forecast of 4% for FY 2025-26.

Union Bank termed the RBI’s policy actions as a form of “stealth easing”, where the central bank has frontloaded rate cuts and eased liquidity without explicitly signalling further cuts. The report emphasizes that future monetary policy decisions will be data-dependent, guided by evolving inflation data, geopolitical risks, and the US Federal Reserve's stance.

CRR Cut as a Key Liquidity Lever

The 100 bps reduction in the CRR, to be implemented in four tranches, is identified as a critical tool for improving monetary transmission. According to Union Bank, the CRR cut will:

  • Enhance the money multiplier effect

  • Lower the cost of funds for banks

  • Support an increase in NIMs

Union Bank notes that Governor Sanjay Malhotra has highlighted that the CRR cut could boost NIMs by 7 bps, thereby helping banks absorb the repricing impact of the repo rate reduction, especially on EBLR-linked loans.

Long-Term Effects Will Take Time

While both banks agree that the RBI’s dual approach—rate cuts combined with liquidity measures—will be beneficial for credit growth, the full impact will manifest over 2–3 quarters. Union Bank warns that global uncertainties may still hamper investment sentiment and delay recovery in capital expenditure and loan demand.

Nonetheless, both reports see the recent steps as supportive of economic growth, especially in the real estate and infrastructure sectors, provided macroeconomic stability continues.

Conclusion

The SBI and Union Bank reports collectively signal a new phase in India’s monetary policy. While the rate cut brings immediate relief to borrowers, it also poses challenges for banks’ profitability. However, through strategic CRR reductions and a strong liquidity framework, the RBI has aimed to balance growth with stability.

Looking ahead, stakeholders must monitor inflation, global economic cues, and domestic credit trends, as policy direction becomes increasingly data-driven.

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