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Mumbai: Amid intensifying pressure on banks to retain and mobilise deposits, data from the Reserve Bank of India show that the pass-through of policy rate cuts to outstanding deposits remains relatively modest at around 34%.
An analysis by Bernstein highlights that despite a cumulative 125-basis-point (1.25-percentage-point) cut in the repo rate, outstanding term deposit rates have declined by just 42 basis points between January 2025 and January 2026. Fresh deposit rates have adjusted by 99 basis points, reflecting a nearly 79% transmission.
The divergence suggests lenders are reluctant to reprice existing deposits sharply, on concerns that lower rates could prompt customers to shift funds to alternative investment avenues.
"Transmission on outstanding deposits is still modest versus the 80% seen during the tightening cycle, leaving room for further repricing benefits (for banks)," said Pranav Gundlapalle, head of India Financials at Bernstein. "Coupled with our expectation of continued surplus system liquidity, this should support more favourable NIM (net interest margin) outcomes for banks, relative to NBFCs over the next 12 months."
Gundlapalle's analysis shows that despite lower headline transmission on the asset side-owing to most of their loans being linked to marginal cost of funds-based lending rate (MCLR)-state-run banks appear better positioned than private sector peers. Greater downside risk to lending yields sits with private banks, and even a sharper MCLR pass-through is unlikely to meaningfully tilt the margin advantage in their favour.
Term deposit growth for banks slowed to 11.0% year-on-year in the October-December quarter from 14.1% a year earlier, as household savers increasingly reallocated funds to debt mutual funds, government small savings schemes and equities. Term deposits rose by ₹14.8 lakh crore from a year earlier to ₹148 lakh crore as of end-December.
"Transmission of policy rate cuts to deposit rates remained gradual, as a large share of term deposits contracted at earlier higher rates continued to reprice with a lag," said Sanjay Agarwal, senior director at CareEdge Ratings. "This stickiness in deposit rates reflects banks' continued competition for deposits amid credit growth outpacing deposit mobilisation, thereby keeping funding costs elevated and exerting pressure on margins."
An analysis by Bernstein highlights that despite a cumulative 125-basis-point (1.25-percentage-point) cut in the repo rate, outstanding term deposit rates have declined by just 42 basis points between January 2025 and January 2026. Fresh deposit rates have adjusted by 99 basis points, reflecting a nearly 79% transmission.
The divergence suggests lenders are reluctant to reprice existing deposits sharply, on concerns that lower rates could prompt customers to shift funds to alternative investment avenues.
"Transmission on outstanding deposits is still modest versus the 80% seen during the tightening cycle, leaving room for further repricing benefits (for banks)," said Pranav Gundlapalle, head of India Financials at Bernstein. "Coupled with our expectation of continued surplus system liquidity, this should support more favourable NIM (net interest margin) outcomes for banks, relative to NBFCs over the next 12 months."
Gundlapalle's analysis shows that despite lower headline transmission on the asset side-owing to most of their loans being linked to marginal cost of funds-based lending rate (MCLR)-state-run banks appear better positioned than private sector peers. Greater downside risk to lending yields sits with private banks, and even a sharper MCLR pass-through is unlikely to meaningfully tilt the margin advantage in their favour.
Term deposit growth for banks slowed to 11.0% year-on-year in the October-December quarter from 14.1% a year earlier, as household savers increasingly reallocated funds to debt mutual funds, government small savings schemes and equities. Term deposits rose by ₹14.8 lakh crore from a year earlier to ₹148 lakh crore as of end-December.
"Transmission of policy rate cuts to deposit rates remained gradual, as a large share of term deposits contracted at earlier higher rates continued to reprice with a lag," said Sanjay Agarwal, senior director at CareEdge Ratings. "This stickiness in deposit rates reflects banks' continued competition for deposits amid credit growth outpacing deposit mobilisation, thereby keeping funding costs elevated and exerting pressure on margins."
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