RBI Rate Cut Spurs Banks to Slash Lending Rates, Boosting Borrowers
Following RBI’s surprise 50 bps rate cut and CRR reduction, Bank of Baroda and HDFC Bank lower lending rates, easing loan costs for customers.
RBI’s Bold Monetary Moves to Stimulate Growth
The Reserve Bank of India unexpectedly slashed its primary repo rate by 50 basis points on Friday, lowering it to 5.5%—a sharper drop than financial markets had foreseen. This marked the third consecutive rate cut in 2025, as the central bank pursues measures to revive economic growth amid persistent challenges. In addition to lowering the interest rate, the RBI unexpectedly cut the Cash Reserve Ratio by one percentage point, bringing it down to 3%, catching markets off guard. This move is designed to inject an additional ₹2.5 lakh crore into the banking system, thereby increasing the funds available for lending.
The RBI’s Monetary Policy Committee (MPC), chaired by Governor Sanjay Malhotra and comprising three external members, voted 5-1 in favor of these changes, reflecting broad consensus on the need for monetary easing. These measures collectively aim to enhance liquidity, lower borrowing costs, and ultimately support demand across sectors.
Bank of Baroda Quickly Implements Substantial Reduction in Lending Charges
This reduction in its Repo Linked Lending Rate (RLLR) became effective from June 7, aligning fully with the RBI’s policy adjustment. The updated Repo Linked Lending Rate (RLLR) has been adjusted to 8.15%, clearly mirroring the central bank’s rate reduction and transferring the benefit to borrowers.
BoB’s move is expected to bring tangible relief to customers with loans tied to the repo rate, including home loans, vehicle financing, and other credit facilities. By lowering the interest burden, the bank is helping boost consumer spending and business investments—key drivers for economic recovery.
HDFC Bank Lowers MCLR, Offering Relief to Loan Customers
At the same time, HDFC Bank, a prominent private sector institution, declared a 10 basis point decrease in its MCLR across multiple loan durations, with the new rates taking effect from June 7. Borrowers with loans tied to the MCLR, such as numerous home and personal loans, stand to gain from this reduction.
The overnight and one-month MCLR rates have been lowered from 9.00% to 8.90%. The MCLR for a three-month tenure has been revised to 8.95%, marking a decline from the previous rate of 9.05%. Similarly, the six-month and one-year rates have been trimmed to 9.05%, representing a 10 bps reduction. Interest rates for loans with durations of two and three years have been revised downward, decreasing from 9.20% to 9.10%.
These adjustments signal HDFC Bank’s commitment to easing borrowing costs in line with RBI’s accommodative stance. By offering slightly reduced interest rates, the bank aims to stimulate loan demand and support growth for retail and corporate clients alike.
The Broader Economic Significance of RBI’s Rate Cut
The RBI’s bold move to loosen monetary policy highlights its growing apprehension about decelerating economic momentum, driven by global instability, geopolitical strife, and trade-related disturbances weighing on India’s financial prospects. By reducing the repo rate and CRR, the central bank intends to bolster liquidity, encourage lending, and lower financing costs for businesses and consumers.
The injection of ₹2.5 lakh crore liquidity through CRR reduction is a powerful tool to enhance banks’ capacity to extend credit, particularly vital for sectors like manufacturing, infrastructure, and real estate, which depend heavily on borrowing.
This shift in monetary stance builds upon previous rate reductions earlier in the year—a 25 basis point cut introduced in February, marking the first easing since May 2020, followed by an additional 25 basis point decrease in April. Together, these three consecutive cuts total a 100 bps easing in 2025, marking a clear shift toward supporting economic revival.
Impact on Borrowers and Market Expectations
Borrowers stand to gain significantly from these rate reductions. Lower lending rates can reduce monthly EMI burdens for loan holders and potentially encourage new borrowing for home purchases, vehicle financing, business expansion, and other needs.
Additionally, the improved liquidity scenario is likely to enhance credit availability and reduce borrowing costs for small and medium enterprises, which are crucial engines for employment and economic activity.
The market has responded positively to the RBI’s measures, with benchmark equity indices witnessing gains, reflecting optimism about sustained growth and easing financial conditions.
Final Thoughts
The Reserve Bank of India’s surprise 50 basis point rate cut and 100 basis point CRR reduction constitute a strong policy thrust to revive economic momentum. Banks like Bank of Baroda and HDFC Bank have quickly translated these policy changes into lower lending rates, directly benefiting borrowers and stimulating credit demand.
BoB’s full pass-through of the repo rate cut to its lending rates and HDFC Bank’s across-the-board MCLR reductions underscore the banking sector’s readiness to support economic recovery through easier financing.
While challenges remain on the global front, the RBI’s proactive approach, combined with responsive banking institutions, creates a more conducive environment for growth, consumption, and investment in India’s economy.
This policy easing, alongside improved liquidity, is expected to accelerate credit flows and bolster confidence among businesses and consumers alike, setting a positive tone for the coming months.
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