RBI set for rate cut, banks’ cost of funds may not drop

MUMBAI: RBI began its rate-cutting cycle in Feb with a 25 basis point reduction in the repo rate, but deposit rates have largely remained unchanged. While banks have passed on the benefit to home loan borrowers, the impact on depositors has been limited.
According to RBI data, the weighted average domestic term deposit rate (WADTDR) stood at an eight-year high of 6.91% in 2024-25. For Feb, the WADTDR touched a nine-year high of 7.02%. Only a few banks, including Bank of Baroda, HDFC Bank, and Yes Bank, have reduced rates by 15 to 40 basis points. However, this has not translated into a wider cut in fixed deposit rates across the sector. The absence of a broad-based reduction is evident in both the weighted average deposit rate and the marginal cost of lending rate, which influences bank lending to businesses.

The central bank is expected to announce another 25 basis point cut in the repo rate at the end of its three-day monetary policy committee meeting on Wednesday. However, the transmission of this cut into banks’ cost of funds may be delayed. This lag is partly due to changing depositor behaviour, with more investors shifting to stock markets and moving surplus funds from savings accounts to fixed deposits.”The present market volatility-whether it will result in a behavioural change among retail investors-is something that will have to be seen over a longer period and not immediately. But there has to be a significant narrowing of the gap between savings account and fixed deposit rates for the share of current and savings account to rise,” said Anil Gupta, senior vice president, ICRA.
“We are not expecting a steep reduction in FD rates because of the pressure on the liquidity coverage ratio for banks. We believe that the rate cut will be higher for wholesale deposits. So if we assume a 75 basis point reduction in the repo rate in the current cycle, we think that the funding costs will go down by 30-35 basis points,” Gupta added.
Madan Sabnavis, chief economist, Bank of Baroda, said, “Transmission is the tricky issue which will depend on how individual banks are placed. With liquidity normalizing and likely to remain calm for some time, there is a higher possibility of banks lowering deposits rates now, though not in a commensurate manner. This can move the Marginal Cost of Funds-based Lending Rate (MCLR) and overall lending rates.”
“Presently the External Benchmark Lending Rates (EBLR) move along the repo rate path, though the MCLR-based loans get linked with the deposit rates. Hence we can expect a higher degree of transmission this time if the RBI lowers rates further considering that liquidity is comfortable,” said Sabnavis.
Banks may be more willing to reduce rates if the RBI shifts its policy stance to accommodative from neutral. A change in stance would indicate a readiness to ease further if financial markets face volatility.