Lending Rates Expected To Drop 30 Basis Points Following Policy Rate Cut: SBI Report

(MENAFN- KNN India) New Delhi, Jun 7 (KNN) Lending rates across the banking sector are projected to decline by approximately 30 basis points in response to recent monetary policy adjustments, according to a comprehensive analysis released by the State Bank of India.

The reduction is anticipated to provide immediate relief to borrowers while presenting margin challenges for financial institutions.

The policy rate reduction is expected to have swift transmission effects, particularly impacting loans linked to the External Benchmark Lending Rate.

All Scheduled Commercial Banks, which hold a 60 percent share of the EBLR-linked loan portfolio, will experience immediate rate adjustments. This mechanism ensures that the benefits of lower policy rates reach consumers without significant delays in the transmission process.

The sharp decline in policy rates will result in reduced borrowing costs for a substantial number of banking customers, particularly those with variable rate loans tied to external benchmarks.

However, this customer benefit comes with potential implications for banking sector profitability, as institutions face pressure on their interest rate margins due to the compressed spread between lending and deposit rates.

To mitigate the impact on banking sector margins, the Reserve Bank of India has simultaneously implemented a reduction in the Cash Reserve Ratio.

This complementary measure is designed to lower the cost of funds for banks, potentially offsetting some of the margin compression resulting from reduced lending rates.

The CRR adjustment represents a coordinated approach to monetary policy implementation.

Banking institutions are expected to see improvements in their Net Interest Margins ranging from 3 to 5 basis points due to the CRR reduction, according to SBI's calculations.

While the mathematical impact on deposit and lending rates may not be immediately apparent, the measure provides banks with enhanced flexibility in managing their funding costs and maintaining operational efficiency.

The CRR cut will also influence broader monetary dynamics by reducing base money in the system and increasing the money multiplier by 20 to 30 basis points.

This adjustment is expected to have positive implications for overall market liquidity, supporting credit growth and economic activity across various sectors.

Financial institutions have already begun adjusting their deposit rate structures in anticipation of the policy changes.

Fixed deposit rates have been reduced by 30 to 70 basis points since February 2025, with industry analysts expecting this downward trend to continue in the coming months as banks align their product pricing with the new interest rate environment.

Historical analysis indicates that policy rate reductions typically result in pressure on banking sector margins, though the specific impact varies significantly across individual institutions based on their asset-liability composition and business models.

The current environment suggests a general compression in Net Interest Margins across the sector, requiring banks to focus on operational efficiency and volume growth.

The monetary policy outlook remains data-dependent, with future adjustments contingent upon evolving economic conditions and key performance indicators.

While policy space for further rate cuts appears limited, recent developments including substantial profit transfers from the central bank to the government have enhanced fiscal policy flexibility.

SBI's analysis suggests no anticipated changes to policy rates in the immediate quarter ahead, indicating a period of stability that will allow financial institutions and borrowers to adjust to the current rate environment.

This pause is expected to provide clarity for both lending institutions and their customers as they navigate the new interest rate landscape.

(KNN Bureau)

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