With lending rates easing, how much fancy will India Inc continue to hold for bond issuances needs to be seen, given that interest rates and bonds have an inverse relation.
The bonanza unveiled by RBI last week triggered an equity rally powered by banks, NBFCs and real estate shares on hopes that a front-ended 50 bps repo rate cut could have a multiplier effect on the economy, in terms of propelling growth.
Bank Credit
Sentimentality, lower interest rate is a sweetener for a borrower to tap on more bank credit. That said, credit offtake at this point has been low, with the latest fortnightly data for May 2025 indicating that the credit growth has been at a meagre 7 percent mark for the banking system.
A 100 basis points reduction in repo rate is certainly a move in the right direction to get the interest rates lower, but there is a catch.
When the repo rate was 4 percent, till May 2022, lending rates across the board were also at the lowest. For instance, a home loan was available at 6.5 percent, car loan at 7.1 percent and businesses could access credit at near about the government securities rate of 6-6.75 percent, for well-rated companies. Those with slightly adverse credit rating could borrow between 8-9 percent. Despite a 250 bps increase in key rates, the lending rate did not become unaffordably high, especially for new loans.
At the peak of the rate hike cycle, fresh home loan was available at 8.5 percent and corporate borrowings rates were in the ballpark of 8.5-9.25 percent. Given the muted credit offtake in the past, banks were not in a position to charge a premium over and above the repo rate. Therefore, as rates trend lower, while logically banks may start reducing their lending rates, but going back to the good days for borrowing in 2021-22 may not be easy.
Also, with lending rates easing, how much fancy will India Inc continue to hold for bond issuances needs to be seen, given that interest rates and bonds have an inverse relation.
That said, while the overall expectation is that the bank credit should see a pick up - possibly three months from now - but it is too early to predict the upside of RBI rate cuts.
Economy
Not many can conclusively say if the front-loaded 50 bps repo rate cut can help upgrade the FY26 GDP estimate, at least not yet. That RBI has maintained the GDP growth estimate for FY26 at 6.5 percent despite a 50 bps rate cut suggests that there may not be an immediate upside for growth. What needs to be seen is whether the 7.4 percent GDP growth of Q4FY25 can be sustained for FY26, since the downside risks of geopolitics, trade, tariffs, or border tensions continue to persist.
The less spoken about advantage of a rate cut is a positive nudge towards consumption spending. Theoretically, when rates are low, retail sentiment is towards spending rather than saving. Household saving rate increasing to 12 percent - as per the latest RBI data - infused confidence that lower rates may once again boost consumption, especially towards creation of fixed and income generating assets.
Likewise, it would also be interesting to see how India Inc reacts to the rate cut. While capacity utilisation has been at a multi-quarter high for several months in a row - breaching the 75% mark - it has not yet resulted in meaningful capex revival. Unfortunately, capital expenditure spending is a vicious cycle, depending on demand. Incoming data, especially six months from now, will be critical to suggest whether Indian manufacturing sector has reached a point where it has to necessarily invest in capex in order to match demand.
Retail Consumers
For the commoners, a reduction in repo rate means a natural reduction in the cost of loans. While existing loans should also reprice downwards, there could be a lag in the process. However, whether incremental saving on interest cost will be deployed towards procurement of income-generating assets depend on the comfort of household savings. What will also play a factor is the movement of retail savings at a time when the market is stabilizing. The previous wave of market returns between 2022-24 saw retail money rush to the stock market either as direct investment or mutual fund inflows.
What will also be important to watch is if retail investors will continue to show as much loyalty to bank deposits. Going by the current trend, the fight for deposits may have far from abated. While large banks may be at an advantageous position to slash deposit rates and yet maintain growth, mid and small-sized banks may not be able to do the same. With over 50 percent of loans handed out by banks dependent on cost of deposits, it needs to be seen how much leeway banks have to reduce deposit rate and maintain growth.
In short, for the retail investors and savers like us, the next six months would be critical in determining the direction of advantage that could be derived from RBI’s June policy rate cut.
Source: Moneycontrol.
