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Informist, Wednesday, Jul. 9, 2025

MUMBAI – A 50 basis point cut in the policy repo rate can lead to a 1.20% decline in the net interest income of banks, according to a study by the Boston Consulting Group. In the case of a 50 bps hike in the repo rate, the net interest income of banks can rise by 1.11%, it said. 

State-owned banks have shown a stronger correlation to changes in the repo rate as compared to private sector banks. A 50 bps reduction in the repo rate leads to a 1.56% contraction in net interest income of state-owned banks, while a 50 bps hike can translate to a 1.45% rise, the report titled 'Interest Rate Sensitivity in Indian Banking: An Empirical Look & its Strategic Implications' said.

"While earnings of banks get adversely impacted, the market value of a bank's equity, given banks tend to have higher duration of assets vis--vis liability, tends to improve as interest rate reduces," it said. Since February, the Reserve Bank of India has cut the repo rate by 100 bps to 5.50%, of which 50 bps was in the latest policy review in June. 

The study showed that a 50 bps cut in the repo rate leads to a 1.51% fall in loan growth for state-owned banks, while a 50 bps hike in the repo rate leads to a 1.4% rise. Among private sector banks, medium-sized institutions exhibit greater sensitivity than large ones, which tend to be more insulated from rate changes. The study also found that rate changes are passed on more gradually to existing loans, while new borrowings reflect a stronger and more immediate transmission.

According to the report, banks show a positive, though weak, correlation with changes in the repo rate. Public sector banks show a positive correlation with changes in the repo rate, both increases and decreases, according to the study. However, the strength of this relationship remains modest, even when accounting for a lag of one year. "Private banks also show a positive and slightly higher sensitivity to repo rate changes compared to PSBs (public sector banks). Despite this, the overall impact remains limited," it said. 

Banks need to do a better job of integrating interest rate risk, including the uncertainty emanating from sharp changes in their strategic plans as well as budgeting exercises. "Banks need to use analytics to retain depositors and offer them optimal liability products based on their risk profile and behaviour," it said.  End

Reported by Srijita Bose

Edited by Saji George Titus

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