Given that deposit mobilisation continues to be a challenge, banks may not bring down deposit rates immediately despite the Reserve Bank of India’s 25-basis-point repo rate cut on Friday.
“Banks are already facing challenges on CASA and deposits. If we reduce the deposit rate further, it is going to hurt us. We may consider cutting it later, depending on competition, but only in January — nothing in December. For now, I think deposit rates will remain as is,” an official at a public sector bank said.
Public sector bank official on deposit pricing
Another banker at a public sector bank noted that while deposit repricing will take place, it will have a lag effect. “We have already absorbed 100 basis points of the rate cut; this 25-basis-point cut would take another two quarters to absorb,” he added.
The banking system’s credit-deposit (CD) ratio has crossed 80%, reflecting strong credit demand while deposit growth remains moderate. The ratio rose to 80.44% in the fortnight ended October 17 before easing slightly to 80.21% by October 21. The widening gap between credit and deposit growth, particularly since the start of the festive season and following the GST rationalisation in September, reinforces the funding pressures facing banks.
What did Vinod Francis say?
Vinod Francis, General Manager and Chief Financial Officer at South Indian Bank, noted that lenders are mandated to pass on repo-linked rate cuts to borrowers, which is reducing spreads. “To manage the impact of the reduced margins, lenders may explore opportunities to reprice their deposits accordingly,” he said.
In response to the cumulative 100 bps cut in the policy repo rate, the weighted average lending rate of scheduled commercial banks reduced by 69 bps for fresh rupee loans during February-October 2025 (the interest rate effect is 78 bps). The moderation in the weighted average lending rate of outstanding rupee loans has been to the extent of 63 bps. Transmission has been broad-based across sectors.
On the deposit side, the weighted average domestic term deposit rate on fresh deposits has declined by 105 bps, while that on outstanding deposits has softened by 32 bps over the same period.
Market participants also highlighted that the transmission of rate cuts would affect the profitability of banks. Prakash Agarwal, Partner at Gefion Capital, said, “The immediate impact of the rate cut will be reflected in net interest margins, as nearly two-thirds of bank lending is linked to external benchmark rates. With the reduction, most of these loans will now yield lower returns, while banks’ own funding costs are expected to decline only gradually,” he said. He also said that the RBI’s announcement on open market operations should improve system liquidity, helping to lower interest rates.
“That said, deposit growth in the banking system has been moderate, and banks’ own funding costs are unlikely to see commensurate fall, as competition for deposits will require them to continue offering competitive rates. Overall, this should be negative for the profitability of banks in shorter term,” he added.
