Lenders are unlikely to sharply cut deposit and MCLR rates despite cut in repos, say senior bankers

FILE PHOTO: FILE PHOTO: Reserve Bank of India (RBI) Governor Sanjay Malhotra | Photo credit: HEMANSHI KAMANI

CS Setty, Chairman, State Bank of India, says, “It’s a superficial rate cut of 25 basis points, I don’t think the banks will cut deposit rates aggressively. Credit growth is robust, all of us will be looking for deposits. At the same time, a 25 basis points cut in repos would have minimal impact on margins as the full benefit of a 1 percent cut in CRR (cash reserve ratio) is available. And what cut we had a year ago, the fixed deposits will be repriced at that level. That benefit will also be available to banks.”

Another senior official at a public sector bank shared similar views, saying deposit rates are unlikely to fall in line with repo cuts, given expectations of higher credit growth in the second half of FY26 and intense price competition, especially from small and medium lenders.

Role of liquidity

Karthik Srinivasan, head of the financial sector ratings group at ICRA Ratings, said lowering deposit rates will depend on the trajectory of credit growth. As interest rates pick up, banks face the challenge of lowering deposit rates. “A small reduction could happen at certain timeframes, but this will depend on an entity to entity basis. Liquidity also plays a role in determining deposit rates. We have seen banks cutting interest rates on term deposits in the last three to four months. We are now approaching the end of the third quarter and the fourth quarter is generally a busy season for banks,” he said.

Banking system liquidity for the period since October 2025 averaged a surplus of ₹1.5 lakh crore, per RBI. In response to the cumulative cut of 100 basis points between February and October 2025, banks’ weighted average lending rate (WALR) fell by 69 basis points for new rupee loans, while the WALR of outstanding rupee loans fell by 63 basis points. On the deposit side, the weighted average domestic term deposit rate (WADTDR) on new deposits has fallen by 105 basis points, while that on outstanding deposits has fallen by 32 basis points.

MCLR

According to Setty, MCLR is a formula-driven benchmark and unless banks’ funding costs do not fall, MCLR will not be adjusted.

“While the 125 basis points repo cut has led to faster revaluation of repo-linked loans, deposits have not been repriced as credit growth returns and there is more competition to mobilize deposits. I don’t think we have been able to pass on the entire repo cut to deposits. This means that banks that, like us, have a larger MCLR book, their margins are still protected,” he said.

Harsh Dugar, ED, Federal Bank, said money market rates have remained aligned with policy repo rates given easy liquidity conditions. “…There is expected to be broad-based transmission of interest rates, both in deposit rates and lending rates. The MPC has cut the FY26 inflation forecast by 60 basis points to 2 per cent, which could give the RBI room for further reduction in repos, if justified,” he said.

ICRA’s Srinivasan, meanwhile, says banks have already had to cut interest rates on repo loans or other external benchmark loans. Going forward, lenders that choose to maintain their margins will be cautious about lowering the MCLR rate. “If at all there could be a small reduction of 5 basis points by lenders, especially PSBs which have a higher share of MCLR-linked loans,” he said.

Published on December 9, 2025