RBI liquidity boost may lower lending rates sooner than expected

Mumbai: Industry experts believe that short-term borrowings will likely cost less for mainstream Indian lenders as early as next month. Multiple-and simultaneous-central bank measures to boost systemic liquidity will help reduce the rates on instruments such as certificates of deposit (CD) and commercial paper (CP). Lower capital costs should also bring down lending rates earlier than expected.

“The central bank’s stance on liquidity management seems to have shifted toward ‘accommodative’ from ‘neutral’, as reflected in the large liquidity infusion through multiple tools,” said Soumyajit Niyogi, director-core analytical group at India Ratings. “If this continues, the overall rates in the economy, including lending rates by banks, may start softening.”

However, the bet is on short-term rates easing first in FY26, when lower inflation is expected to help prolong the Reserve Bank of India‘s (RBI) easing cycle.

“Short-term rates will ease during the first half of the coming fiscal year as the RBI looks to ease financing conditions through boosting base money creation, especially when the overall operating and financing environment is facing multiple headwinds,” Niyogi said.

The current liquidity crunch has led to higher interbank call rates, driving up overnight borrowing costs for banks. The weighted average call rate (WACR) reached a high of 6.81% in January before dropping to 6.21% on March 12. Typically, the WACR operates within a corridor, with the repo rate (6.25%) as the ceiling and the reverse repo rate as the floor.

The three-month CD rate also rose by 25-30 basis points in December.

The RBI has already infused ₹4.1 lakh crore of liquidity into the market through open market operation purchases (OMO). Another ₹1 lakh crore of OMO purchases are to be held through two auctions in March.

There were $15.16 billion of dollar/rupee buy/sell swaps auctioned, and another $10 billion buy/sell swaps have been announced for auctions in March 2025. As per India Ratings, the aggregate infusion of rupee liquidity through swaps could be around ₹2.15 lakh crore by the next quarter.

The overall infusion of around ₹4.5 lakh crore of rupee liquidity is likely to shift the banking system liquidity into the surplus territory. Along with the current measures, a dividend transfer from the RBI to the government will add to the rupee liquidity in the system and further boost the system liquidity, the rating agency noted.

“The RBI is also likely to maintain adequate liquidity in the system through various tools, while banks’ liquidity will remain sufficient thanks to existing statutory liquidity and cash reserve requirements,” said Amit Pandey, vice president and senior analyst at Moody’s Ratings. “Net interest margins will decline marginally as banks reflect policy rate cuts in loan rates before repricing deposits.”