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Kolkata: By cutting the policy Repo Rate by 25 basis points, Reserve Bank of India seems to have delivered another push to consumption with two PSU banks Bank of Baroda (BoB) and Bank of India (BoI) announcing full transmission of the benefit in lending rates on Friday evening itself. The signal is quite clear: most other banks would soon follow in the next few days.
BoI has trimmed the RBLR (Repo Based Lending Rate) from 8.35% to 8.10% while BoB reduced it from 8.15% to 7.90%. For both the banks the new rates will be effective immediately. This is the fourth time that RBI has slashed the Repo Rate in 2025 between February and December, bringing it down from 6.5% to 5.25%. The point is now to see whether a full transmission of the benefit takes place in the real economy, as RBI governor Sanjay Malhotra mentioned.
Earlier in September, it was reported that full transmission of the rate cut in August did not reach the real economy since bond yields were seen to be rising even as RBI was cutting rates and analysts pointed out that it was quite unusual for the divergence between the two. The yield of 10-year government bonds remained elevated, which prevented the banks from cutting the rates following RBI's rate-cut decision. On Friday, the RBI governor also announced that it will boost liquidity by Rs 1 trillion through Open Market Operations this month. This cash can be used by banks for lending that will create demand.
It was clear from the move that the RBI was trying to support growth in the face of the 50% tariff slapped on Indian goods by the US, which was a drag on the economy and with an Indo-US bilateral trade deal yet proving elusive, it is not clear how long the headwind will continue. Significantly, many economists did not expect the RBI to exercise the scissors on the policy rate in December after the Q2FY26 GDP growth numbers were reported at 8.2%, something beyond expectations of almost everybody.
Commenting om the RBI move, C S Setty, SBI chairman said, "...The move reinforces the structural drivers of a “higher-for-longer” growth trajectory, spanning investment, credit, and consumption. Meanwhile, concurrent liquidity-management measures are intended to anchor money-market rates and lower borrowing costs. Together, the rate cut, neutral stance, and targeted liquidity interventions aim to sustain economic momentum while safeguarding price and financial stability.”
It is expected that the interest rates on loans that are linked to the Repo Rate will come down first. Then banks will reduce their MCLR and the rates tied to this rate will come down. Almost all loans these days -- car loans, home loans, personal loans and even education loans -- are tied to the Repo Rate and the MCLR and the benefit of Friday's rate cut could reach a huge section of the borrowers. Needless to say, the lower rates could also nudge a lot of individuals to consider fresh loans that could fuel consumption.
The year 2025 will go down in history as a year when the government and central bank were firing all cylinders to boost consumption, which constitutes about 60% of the Indian GDP. In the Union Budget on February 1, FM Nirmala Sitharaman announced significant income tax relief, freeing income up to Rs 12.50 lakh a year from income tax. That put a decent amount of additional cash in the salary-earners wallet. Now the RBI has brought down the policy Repo Rate by a cumulative 125 basis points between February and December, reducing the cost of funds significantly. The third impetus came in early September when the GST Council implemented the GST reforms abolishing two slabs and bringing down indirect taxes on more than 91% of the goods.
