RBI Pushes For Better Rate Transmission, But Structural Frictions Persist

In a strong push to revive economic momentum and improve rate transmission, the Reserve Bank of India today cut the repo rate by 50 basis points and unexpectedly slashed the cash reserve ratio by 100 basis points. This is the third straight easing move in 2025, adding to February and April’s combined 50-basis-point cuts. But structural frictions in the banking system may still blunt their impact on the broader economy.

Monetary policy sets the necessary conditions for easing, but not the sufficient ones. The RBI’s intent is clear: amplify transmission and stimulate credit by infusing liquidity into the banking system. This requires more than just policy signals. 

It demands responsiveness from banks themselves. 

Financial markets did react swiftly, with a 70-basis-point drop in the weighted average call rate and over 140 basis points in short-term CP and CD rates. Bank lending and deposit rates, however, have been slower to adjust. Between February and April, lending rate transmission was limited to just 6–17 basis points, while deposit rates moved even less.

The sharpest CRR cut since the March 2020 crisis is expected to inject ₹2.5 trillion in liquidity by December 2025. This follows the RBI’s sustained efforts since January, including ₹5.2 trillion via open market purchases and another ₹2.2 trillion through FX swaps. 

With liquidity injection now on overdrive, the RBI hopes to nudge banks into lowering lending rates more meaningfully. Yet this surge is facing roadblocks. Banks are still parking surplus funds with the RBI. 

In April 2025, average parked liquidity stood at ₹2.03 trillion, while the system’s average surplus was only ₹1.71 trillion. Rather than fuelling credit, liquidity is circling back to the central bank.

Uneven Distribution
One major reason for this disconnect is the uneven distribution of deposits and liquidity across banks. In 2024–25, around 70% of incremental deposits were cornered by SBI and the top three private lenders, giving them outsized pricing power and leaving smaller banks short of funds. 

This has kept funding rates elevated. With liquidity concentrated, several banks continue to command high lending rates. Moreover, lenders are hesitant to lower rates aggressively given ongoing pressure on net interest margins. The latest 50-basis-point rate cut alone has shaved off 5–10 basis points from sector-wide NIMs, a difficult trade-off for banks already past their profitability peak.

Adding to the challenge is a shift in depositor behaviour. With more savers opting for short-term or bulk deposits instead of stable retail deposits, banks face renewed difficulty in reducing deposit rates without compromising profitability. In past easing cycles, deposit rate transmission typically lagged, and this pattern is repeating. While transmission is quicker in bulk deposits and loans linked to external benchmarks, it remains slower for MCLR-based and retail lending products.

The RBI is also contending with broader liquidity frictions. Elevated and volatile government balances with the RBI, combined with banks’ precautionary liquidity demand, are reducing the funds available for credit. Despite aggressive liquidity infusion, reserve money growth remains muted, pointing to deeper caution within the system.

While the RBI has taken a strong policy stance to accelerate transmission, success will hinge on banks’ willingness to relinquish rate rigidity and deploy surplus liquidity. Transmission is not automatic. It requires operational liquidity to be released, not merely injected. For now, the RBI has opened the taps, but banks still control the flow. Unless they recalibrate deposit pricing, expand lending, and adapt to shifting macro conditions, the real economy may not fully benefit from the central bank’s assertive push.