The repo rate cuts announced by the Reserve Bank of India between 2025 and 2026 have yet to fully reflect in bank deposits. Data show that only about 34% of these rate cuts have passed through to outstanding deposits, with fresh deposit rates adjusting more significantly. This muted response affects depositors seeking returns and banks aiming to retain their deposit base amid shifting customer preferences.
- What happened with repo rate cuts and bank deposits
- Key numbers behind repo rate cuts and deposit rates
- Why repo rate cuts matter for deposit rates and banks
- Who is affected by muted pass-through of repo rate cuts
- Context of repo rate cuts and historical deposit rate trends
- Practical implications of repo rate cuts on depositors and banks
What happened with repo rate cuts and bank deposits
Between January 2025 and January 2026, the Reserve Bank of India (RBI) implemented a cumulative 125-basis-point cut in the repo rate. But bank data indicate that only around 34% of these rate reductions have translated into lower interest rates on outstanding term deposits. While fresh deposits have seen a sharper 79% transmission with a 99-basis-point decline, older deposits have only adjusted marginally, showing a 42-basis-point reduction. Banks appear reluctant to decrease rates on existing fixed deposits aggressively, fearing that lower yields may prompt customers to move their funds into alternative investment avenues.
Key numbers behind repo rate cuts and deposit rates
The cumulative repo rate cut of 125 basis points by the RBI since early 2025 contrasts sharply with the 42-basis-point decline in outstanding term deposit rates. Fresh deposit rates reflect a near 79% transmission, dropping by 99 basis points during the same period. The overall 34% pass-through for outstanding deposits suggests significant lag and resistance from banks. These figures come amid RBI’s broader monetary easing efforts aimed at supporting growth while keeping inflation in check. The spread between fresh and old deposits highlights strategic repricing decisions by banks balancing margin pressures and deposit retention.
Why repo rate cuts matter for deposit rates and banks
Repo rate cuts usually signal banks to lower deposit rates, reducing their cost of funds and encouraging borrowing. Still, the limited pass-through to outstanding deposits challenges this transmission mechanism. Banks' hesitation to sharply cut existing deposit rates underscores a cautious approach to customer retention as low rates could prompt depositors to switch to equities, mutual funds, or other higher-yielding avenues. This divergence reduces the effectiveness of policy easing in lowering overall lending rates and may constrain banks' ability to boost credit growth. Meanwhile, depositors face reduced returns on existing fixed deposits, influencing saving patterns and investment choices.
Who is affected by muted pass-through of repo rate cuts
The muted pass-through primarily affects retail depositors with term deposits, who experience stagnant or slowly declining interest incomes despite RBI’s rate cuts. Banks face a trade-off between maintaining deposit market share and reducing their interest expenses. Borrowers might see slower transmission benefits as banks' cost of funds remains higher due to sluggish deposit repricing, delaying the easing of loan rates. Non-Banking Financial Companies (NBFCs) that rely on bank funding will also feel the ripple effects. Investors in alternative instruments may benefit from inflows as fixed deposit yields stay sticky, altering capital allocation across the financial ecosystem.
Context of repo rate cuts and historical deposit rate trends
Historically, deposit rates in India have been sticky, especially on existing term deposits, due to customer expectations and contractual terms. Previous RBI rate cuts have often seen a lag in the transmission to deposit rates, particularly during easing cycles. The current trend continues this pattern amid a changing financial landscape with more alternatives for investors. RBI’s gradual approach to reducing policy rates since 2024 was designed to support growth amid moderating inflation. But banks’ cautious deposit repricing reflects concerns about rising competition from mutual funds, digital wallets, and other financial products offering better yields.
Practical implications of repo rate cuts on depositors and banks
Depositors with outstanding fixed deposits should monitor interest rate trends closely and consider laddering deposits or diversifying into other instruments for better yields. Banks need to strategically balance interest rate setting to remain competitive without severely squeezing margins. Borrowers should watch for delayed benefits in loan pricing as slower deposit repricing influences banks’ cost of funds. Policymakers and financial market participants must acknowledge the incomplete transmission when assessing monetary policy impact. Overall, the modest pass-through signals evolving dynamics in India’s banking sector’s response to monetary easing.
Frequently Asked Questions
Why do outstanding deposit rates adjust more slowly than fresh deposit rates?
Outstanding deposits have fixed interest rates locked-in for their tenure, making banks reluctant to reprice them sharply to avoid customer attrition. Fresh deposits provide banks flexibility to offer lower rates aligned with current policy rates.
How does limited pass-through of repo rate cuts affect borrowers?
If banks do not lower deposit rates significantly, their cost of funds remains relatively high, leading to slower reductions in lending rates, which limits borrowers’ benefit from monetary easing.
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Source: ET. Independent analysis by PolicyPulse Media.
