Public Sector Banks Slash Rates Faster Than Private Lenders Post RBI Cuts: Report

Public sector banks (PSBs) have taken a more proactive stance in reducing both lending and deposit rates following the Reserve Bank of India's (RBI) 100‑basis‑point repo rate cut since February 2025, according to data released this week.

Faster Rate Transmission by PSBs

RBI's July Monthly Bulletin reveals that PSBs have reduced their lending rates for fresh rupee loans by 31 basis points up to May, compared to a 20 basis‑point cut by private banks. In contrast, foreign banks led the charge with a 49‑basis‑point reduction. For fresh deposits, PSBs lowered rates by 47 basis points, with private banks trimming their rates by 41 basis points.

This more aggressive rate transmission suggests that public-owned lenders are playing a critical role in ensuring the benefits of monetary easing reach borrowers and depositors promptly.

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Context of RBI's Policy Pivot

The repo rate has been slashed twice this year: once by 50 basis points between February and April, and again by 50 basis points in June. In parallel, banks were directed to cut benchmark-based lending rates in line with the repo moves. Refinancing rates such as the external benchmark-based lending rate (EBLR) dropped by the full 100 basis points, while the marginal cost of funds-based lending rate (MCLR) saw around a 10‑basis‑point fall, according to the bulletin.

Implications for Credit and Deposits

While lending rates dipped more steeply at PSBs, the overall lending momentum has remained subdued. Credit growth began to slow in May, partly due to NBFCs tapping capital markets instead of traditional bank credit. PSBs also led the reduction in savings account interest rates, with some marginally higher than the all-time lows observed since deregulation in 2011. Large banks like SBI are offering savings rates of nearly 2.5%.

Why the Difference Matters

Public sector banks tend to operate with tighter regulatory oversight and are often expected to transmit rate cuts rapidly to stimulate economic activity. Private lenders, on the other hand, are more likely to maintain narrower spreads over their benchmarks, providing more stable but slower rate transmission. By taking the lead on rate cuts, PSBs are supporting RBI's broader goal of alleviating borrowing costs and boosting consumption and investment in a sluggish growth environment.