RBI Repo Rate Cut June 2025 Will Benefit Bank Loan Borrowers; But Will It Aid Banks? Here’s What Experts Say

A better-than-expected Reserve Bank of India's repo rate cut of 50 basis points on Friday may translate into lower lending rates, favouring the borrowers, but will not immediately benefit banks. Rather, it may squeeze their deposit cost and decelerate high-quality credit growth, according to experts. RBI repo rate cuts also impact banks' net interest margins (NIMs).

RBI Repo Rate Cut

Emphasising the Indian economy's "picture of strength, stability and opportunity", RBI Governor Sanjay Malhotra said that the central bank (of India and other emerging nations) has a tougher task to stabilise their economies against global spillovers.

RBI monetary policy initiatives would boost comfortable liquidity surplus in the banking system and will further reinforce transmission of policy repo rate cuts, added Malhotra in his RBI repo rate cut speech. While banks play a major role in transferring the impact of RBI repo rate cut into different sectors of economy, what happens to their profitability during the process? Do RBI repo rate cuts benefit banks? Here's what experts say.

RBI Repo Rate Cut: Does It Benefit Banks?

RBI repo rate cuts impact the profitability of banks in both ways, ie assets as well as liabilities, but the pace and extent of transmission typically varies, noted Subhasri Narayanan, Director, Crisil Ratings.

"In a falling interest rate environment, net interest margins (NIMs) of banks typically compress due to a faster downward repricing of loan assets than deposit liabilities. This is because the advances book of banks has a sizeable share of floating rate loans, within which loans linked to an external benchmark, primarily repo- are typically repriced rapidly after rate cuts," said Narayanan.

What Is The Impact of RBI Repo Rate Cut On Banks?

The RBI has introduced a nearly 100 basis point repo rate cut in since February 2025. The impact of RBI repo rate cuts in FY 25 has been " far more asymmetric, fragmented, and increasingly margin-dilutive for certain bank cohorts", noted Arsh Mogre, Economist, PL Capital.

RBI Rate Cut Impact 'Partial And Uneven'

The RBI repo rate cut since February was aimed to stimulate demand amid falling headline inflation in FY25, however, the impact of repo rate cut has been partial and uneven, opined Arsh Mogre. He also highlighted that the cost of funds of banks has not declined in line with policy intent.

"According to RBI data up to May 2025, the Weighted Average Lending Rate (WALR) on outstanding loans declined just 10 bps, while the WALR on fresh rupee loans paradoxically rose 3 bps. In contrast, the Weighted Average Domestic Term Deposit Rate (WADTDR) on fresh deposits increased by 8 bps, revealing that cost of funds has not eased in line with policy intent," Mogre added.

Impact On Private and Public Sector Banks

In comparison between public sector banks and private sector lenders, PSUs are better positioned to absorb RBI rate cut transmission costs due to their larger Current Account Saving Accounts (CASA).

"This asymmetric adjustment is causing a squeeze on bank profitability, especially for private sector banks (PVBs). While public sector banks (PSBs) were able to reduce fresh deposit rates by 33 bps between January and April 2025, private banks managed only an 8 bps cut, despite similar policy pressures. On the lending side, PSBs lowered WALR by 13 bps compared to 12 bps for PVBs. This suggests that PSBs are better positioned to absorb rate transmission costs-likely due to larger CASA buffers and public funding resilience-while PVBs face intensified margin compression due to greater dependence on costly time deposits and competitive liability franchise pressures," explained Mogre.

RBI Repo Rate Cut Impact on Banks' Return on Assets

An entity's return on assets (ROA) is a company's profitability relative to its total assets as it measures the company's efficiency on how it uses its assets to generate income. Higher RoA means that the company is better at managing its assets.

"Repo rate cut could be favourable for the return on assets (RoA) as the lower cost of borrowing tends to stimulate demand, allowing banks to grow the advances. Currently, with high CRARs banks are effectively sitting on unutilized lending capacity which when put to use shall improve the earning profile resulting in higher RoA," said Vikas Gupta, smallcase Manager and Founder at OmniScience Capital.

Providing a contrasting view on RBI repo rate cut impact on RoA, Crisil in its report said that banks' return on assets (RoA) is likely to contract in FY26 from over a two-decade high of 1.3% in FY25 due to rate cut.