RBI’s Rate‑Cut Bonanza: What Does the Future Hold for Banks?

On June 6, 2025, the Reserve Bank of India (RBI) made a bold move. Under its new governor, Sanjay Malhotra, it slashed the repo rate by a hefty 50 basis points, from 6.0% to 5.5%. At the same time, it cut the Cash Reserve Ratio (CRR) by 1%. That’s a double dose of monetary easing, and it’s the third rate cut this year. Why? The RBI is shifting focus to growth, especially with inflation cooling and global demand softening, according to an exclusive from Moneycontrol.

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1. Why the Sudden Generosity?

Inflation is currently at 3.16%, the lowest level in six years. That gives the RBI some breathing room to loosen policy. Meanwhile, India’s GDP growth has dropped to 6.5% for FY 2024–25, the slowest in four years. That slowdown prompted the RBI to act fast.

Governor Malhotra didn’t mince words. He wants India to aim for 8% GDP growth, not just in theory but in practice. He also signalled flexibility by shifting the RBI’s stance from “accommodative” to “neutral”, meaning they’re watching the data and ready to adjust.

2. What This Means for Markets and Borrowers

Markets loved it. The Nifty Bank index reached a record high of 57,049.50, and the Sensex surged 747 points to approximately 82,189. Why? Investors expect more credit growth and stronger bank earnings.

If you’re a borrower, this is excellent news. A ₹1 crore home loan might now cost you around ₹68,000 a month in EMIs, making housing much more affordable, especially in smaller cities. Analysts believe home loan rates could drop below 7.75%, which would boost both residential and commercial real estate.

3. Liquidity Injection: CRR Cut in Action

That 1% CRR cut isn’t just a number; it’s a liquidity bomb, releasing roughly ₹1.16 lakh crore into the banking system. Add the repo rate cut, and we’re looking at around ₹2.5 trillion in fresh liquidity.

Short-term lending costs are already falling. Treasury bills, commercial paper, and certificates of deposit have seen yields drop by 30–70 basis points since the beginning of January. That’s helped companies tap record bond funding, nearly ₹11 trillion in FY25.

4. How Banks Are Passing It On

Here’s the catch: rate transmission is still patchy. Loan rates, especially floating ones on homes and cars, tend to drop quickly. But deposit rates? They lag. The squeeze between interest earned and paid, known as the net interest margin (NIM), hurts banks.

Even so, early Q4 FY25 numbers indicate that banks are holding steady. ICICI’s NIM is 4.41%, HDFC’s is 3.5%, and YES Bank is at 2.5%. Still, if repo rates fall further, banks could feel more pressure.

5. Public Sector Banks: Racing to Catch Up

Public sector banks are already cutting rates; four have made moves so far. In a rare move, some are even adjusting rates for existing loans, hinting at competitive heat.

However, PSBs heavily depend on retail lending, making them more vulnerable. Yes, the CRR cut helps, but margin compression could hit them harder than private players.

6. Currency Risks Are Creeping In

There’s a flip side to all this easing. According to Moneycontrol, lower interest rates in India compared to the U.S. result in fewer capital inflows. That weakens the rupee. Currently, the 1-month USD/INR forward premium is at its lowest level since November, and the 1-year premium is near a 12-month low.

If the rupee falls too much, it could raise the cost of imports, bringing back inflation risks. The RBI might need to shift its focus again to protect the currency.

7. Who Gains the Most?

Real estate receives a significant boost; lower rates and improved liquidity are a double win for buyers and developers, especially in the affordable housing sector.

Corporations can raise money more easily thanks to lower bond yields and cheaper short-term loans.

NBFCs (non-banking financial companies) are also in a sweet spot. With co-lending partnerships and support from RBI regulations (like gold loan standardisation), they’re set to expand faster alongside banks.

8. Beyond Rates: RBI’s Bigger Game Plan

The RBI isn’t just focused on cutting rates. It’s also laying the groundwork for long-term reforms, including:

• A new way to handle stressed assets, going beyond just Asset Reconstruction Companies (ARCs)
• Expanded co-lending, now covering all types of loans.
• Standardising gold loan rules across lenders
• Tighter cyber security with the launch of the ‘bank.in’ domain
• These moves aim to make the financial system more resilient and ready for future shocks.
   

9. Key Questions Banks Must Face

How low will rates go? Inflation’s under control, but risks still exist. A further 25-bps cut is possible this year, but it depends on the data.

Will transmission work smoothly? Borrowers are seeing benefits, but unless deposit rates adjust, banks will continue feeling the pinch.

Can banks protect profits? They’ll need to lean on treasury gains, fee income, and possibly even cost-cutting measures. Non-interest income could play a bigger role.

What about currency swings? If the rupee continues to fall, the RBI may need to shift its focus back to fighting inflation, which could slow the pace of rate cuts.

10. The Bottom Line

This latest move from the RBI is a calculated gamble. It's a strong push toward growth in the face of weak global signals and domestic slowdown. For banks, it’s a mixed bag.

Short-term? More loans, happier borrowers, and a market that’s buzzing.

Mid-term? Margin worries, especially for public sector banks.

Long-term? If reforms are implemented, India’s credit landscape could look significantly different and much stronger.

Now, it’s on banks to step up: manage shrinking margins, put fresh liquidity to good use, and help power the next phase of India’s growth story.