RBI trims repo rate again: How banks are reacting and what it means for customers

The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points to 6 per cent, following a similar cut in February. The cumulative 50 basis point reduction aims to boost the economy amid easing inflation and pressure from US tariffs on Indian exports. The RBI also changed its stance to “accommodative,” signalling more rate cuts may follow. The policy stance reflects concerns over a global slowdown, a weaker US dollar, falling crude oil prices, and heightened trade-related uncertainties.

What steps have banks taken so far?

Public sector banks have started reacting to the RBI’s decision. Bank of India and UCO Bank both reduced their repo-linked lending rates by 25 basis points. Bank of India’s new Repo Based Lending Rate (RBLR) is now 8.85 per cent, while UCO Bank has lowered it to 8.8 per cent. Both rates are effective immediately. These reductions follow similar moves made after the February rate cut, when public sector banks had reduced deposit rates by 6 basis points and foreign banks by 15 basis points. Private banks had instead slightly raised rates during that period.

What are other banks expected to do?

Other lenders are anticipated to follow the lead of Bank of India and UCO Bank by cutting lending rates in the coming weeks. The SBI report suggests that the weighted average lending rate (WALR) for public sector banks and scheduled commercial banks generally aligns with the repo rate, indicating effective transmission of rate cuts. The RBI’s accommodative stance and the scope for more reductions have raised expectations that the repo rate could fall to 5.25 per cent by the end of the financial year through a series of similar 25 basis point cuts.

How will borrowers be affected?

If the rate cuts are fully transmitted by banks, borrowers could benefit from lower equated monthly instalments (EMIs) on home, auto and personal loans. The latest reduction brings borrowing costs to the lowest since November 2022. However, the extent of relief will depend on each bank’s pace and method of transmission. Lending rates linked directly to external benchmarks like the repo rate are likely to reflect changes more immediately.

What regulatory changes are being considered?

The RBI plans to widen options for managing stressed assets. A new market-based securitisation framework is being developed to complement the existing route through Asset Reconstruction Companies (ARCs) under the SARFAESI Act. This could provide more flexibility for banks in handling non-performing assets (NPAs).

The central bank is also examining a possible expansion of the co-lending model. Currently limited to arrangements between banks and NBFCs for priority sector lending, co-lending could soon include all regulated entities. However, further details are needed to understand the full implications.

What about gold loans and infrastructure financing?

The surge in gold prices and rising gold loan portfolios has prompted regulatory attention. The RBI is expected to issue new, comprehensive rules covering prudential and conduct-related aspects of gold loans. This move comes amid concerns over potential breaches in Loan-to-Value (LTV) limits and discrepancies in lending practices across regulated and unregulated entities.

Additionally, the RBI is reviewing capital rules for partial credit enhancement (PCE) to support infrastructure financing. Currently, capital must be held against the entire bond amount, even if PCE is provided for only 20 per cent. A revision of these norms could help deepen India’s bond market and broaden funding sources.

How is digital payments policy evolving?

The RBI has permitted the National Payments Corporation of India (NPCI) to increase transaction limits for person-to-merchant (P2M) payments on the UPI platform, reflecting changing user needs. However, the cap for person-to-person (P2P) transactions remains unchanged at Rs 1 lakh. The move is expected to encourage higher-value digital payments, such as tax transactions.

What lies ahead for customers and the economy?

With more rate cuts likely and regulatory updates underway, borrowers may see improved access to credit, while businesses could benefit from cheaper loans and increased liquidity. However, savers may receive lower returns as deposit rates fall. The RBI’s approach, while appearing routine, is closely tied to global and domestic challenges. Its current stance allows flexibility for stronger policy responses if needed during the upcoming financial year, with a focus on maintaining financial stability and supporting non-inflationary growth.