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Lending rates are expected to fall by around 30 basis points (bps) following the recent policy rate cut, according to a report by the State Bank of India (SBI).
The report highlighted that the immediate impact will be seen on loans linked to the external benchmark lending rate (EBLR), which make up about 60 per cent of the loan book of All Scheduled Commercial Banks (ASCBs). SBI said "The steep cut on policy rates is expected to pass on to the EBLR linked loan book immediately with ASCB share of 60 per cent. Thus immediate impact on average lending rate could be around 30". The report said the sharp policy rate cut will quickly pass through to the EBLR-linked loans, lowering borrowing costs for many customers. However, this drop in lending rates may affect banks' margins. To help manage this impact, the Reserve Bank of India (RBI) also reduced the Cash Reserve Ratio (CRR), which is expected to bring down the cost of funds for banks. SBI stated "The reduction in CRR may not mathematically translate to any change in deposits and lending rates, however, it may have positive impact on margins (3-5 bps on NIM) of the banks". The report estimated that bank margins or Net Interest Margins (NIM) could improve by 3 to 5 bps due to the lower CRR. The CRR cut will also reduce the base money (M0) in the system, increasing the money multiplier by 20 to 30 bps, which could have a positive effect on overall liquidity. Meanwhile, banks have already started lowering fixed deposit (FD) rates. Since February 2025, FD rates have been reduced by 30 to 70 bps. The report expects this trend to continue, with further cuts likely in the coming months. Past data shows that cuts in policy rates generally lead to pressure on bank margins. While the exact impact will differ across individual banks, a general compression in NIM is expected. The SBI report added that the future path of monetary policy will depend on economic data and evolving conditions. While policy space is limited, the recent large profit transfer from the RBI to the government has improved fiscal flexibility. For now, the report expects no change in policy rates in the next quarter. (ANI)
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