Softer lending rates in the Indian economy continued in July as the RBI's repo rate cuts were passed on to other rates, such as bank lending rates and deposit rates, resulting in an improvement in financial conditions during the month, according to a report released.

Key bank lending rates, such as the one-year marginal cost of funds-based lending rate (MCLR) and auto loan rate, fell 15 basis points to 8.75 percent and 7 basis points, respectively, to 9.19 percent, while deposit rates fell 3 basis points to 6.37 percent during the month, making it easier for banks to raise funds, according to the Crisil Research report.

Key Highlights

• Public sector banks cut lending and deposit rates more than private banks after 100bps RBI rate cuts.
• Despite rate cuts, bank credit growth remains sluggish, suggesting limited impact on borrowing demand.

The weighted average lending rate (WALR) for new rupee loans has also fallen sharply. According to the most recent available data, the WALR fell 58 basis points month on month in June to 8.62 percent, its lowest level since October 2022.

In July, the surplus in systemic liquidity increased slightly, driven by increased government spending and a decline in currency in circulation, further lowering money market rates.

From February to June, the RBI's Monetary Policy Committee (MPC) reduced the policy rate by 100 basis points (bps). As lending rates fell, bank credit growth increased, but it remained lower than in the January-March quarter.

The last two months have seen an improvement in bank credit growth. Sectoral data, which is accessible through June, shows that credit growth has accelerated in the services, industry, and personal loan sectors.

However, equity markets ended July lower than June due to worries about US tariffs that weighed on markets before the August 1 deadline. FPIs, or foreign portfolio investors, sold stocks on the open market.

Due to modest FPI debt outflows in the second half of the month, the yield on the 10-year government security (G-sec) increased toward the end of the month. Despite rate cuts, the yield increased in June and July, which caused the term premium to spike higher.

Systemic liquidity remained in excess for the fourth consecutive month, and it slightly expanded in July as compared to June. A little more than the Rs 2.7 lakh crore in June, the RBI net absorbed Rs 3 lakh crore in July. According to the report, a decrease in the amount of currency in circulation and an increase in government spending helped to support the higher surplus.

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The report also noted that despite the Organization of the Petroleum Exporting Countries and its allies increasing their oil output, crude oil prices stayed relatively stable at $71 per barrel, up from $71.5.