In a surprising trend, banks increased their lending rates in July 2025 despite the Reserve Bank of India (RBI) cutting the repo rate by 50 basis points
in June. According to RBI data, the weighted average lending rate (WALR) on new loans rose to 8.8% in July, up from 8.62% in June. Bankers attribute this divergence from historical patterns to the rising share of high-yielding loans disbursed to micro, small and medium enterprises (MSMEs). Lending to MSMEs typically accelerates after the first quarter of the financial year in anticipation of the festive season, pushing up overall lending rates. Traditionally, banks’ lending rates have closely tracked repo rate movements. For instance, when the RBI cut its policy rate by 25 basis points in April 2025, the WALR on fresh loans fell by six basis points in the following month. Similarly, when the rate cut cycle began in February, a dip in lending rates followed. Conversely, during the Ukraine war-driven global inflationary period, every repo hike by the RBI was mirrored by an immediate increase in WALR. Interestingly, while lending rates moved higher in July, banks were able to lower their cost of funds. RBI data shows that the weighted average domestic term deposit rate on fresh deposits declined to 5.6% in July from 5.75% in June 2025. Meanwhile, credit growth continues to stay strong. As of August 8, 2025, bank credit grew by 10.5% year-on-year, marking a steady double-digit expansion. Analysts say this combination of rising lending rates, lower deposit costs, and robust demand for credit reflects both the resilience of the Indian banking sector and the growing appetite for credit from businesses, particularly MSMEs.
