RBI’s Cautious Stance: Balancing Growth and Stability in a Low-Inflation Era
MUMBAI – In a move that surprised few but relieved millions, the Reserve Bank of India (RBI) on October 1, 2025, decided to keep the benchmark repo rate unchanged at 5.5% for the second consecutive meeting. Governor Sanjay Malhotra, in his post-policy press conference, emphasized the Monetary Policy Committee’s (MPC) focus on “price stability while supporting sustainable growth.” With retail inflation plummeting to a seven-year low of 1.54% in September – the sharpest drop since June 2017, fueled by four straight months of falling food prices – calls for a rate cut had grown louder. Yet, the RBI opted for continuity, citing global uncertainties like the US-China tariff escalations and lingering geopolitical tensions in West Asia.
This decision ripples across India’s banking landscape, where loan growth has hovered at a modest 12-13% year-on-year, lagging pre-pandemic levels. For everyday borrowers, it means no immediate relief on equated monthly installments (EMIs). A typical Rs 50 lakh home loan at 8.5% interest will still cost Rs 39,000 monthly over 20 years, unchanged from last quarter. “We’re in a wait-and-watch mode,” said Malhotra, pointing to robust bank buffers – capital adequacy ratios (CRAR) at 17.2% and non-performing assets (NPAs) at a multi-decade low of 2.3%. Stress tests in the Financial Stability Report (FSR) June 2025 edition show the sector can weather a severe downturn without provisioning spikes.
Bankers echoed the sentiment. HDFC Bank’s MD & CEO Sashidhar Jagdishan noted in an earnings call that “net interest margins (NIMs) are holding at 4.2%, but deposit growth at 11% lags advances, squeezing liquidity.” Public sector giants like State Bank of India (SBI) have already signaled no pass-through of potential cuts, with lending rates pegged 2.5-3% above the repo. On X, #RBIRateDecision trended with over 150,000 posts, many from small business owners venting: “Another quarter of 12% business loan rates? How do SMEs survive?” one Delhi trader posted, garnering 5K likes.
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Business Loan Interest Rates: No Cut, But Tailwinds for SMEs Ahead
The unchanged repo directly impacts business loan interest rates, a hot-button issue amid India’s push for a $5 trillion economy. Current rates for unsecured SME loans range from 11.5% (for top-rated firms via fintech tie-ups) to 15% (collateral-free under CGTMSE scheme), per Moneycontrol data. With inflation at 1.54%, real borrowing costs feel steeper – effectively 10-13% after adjusting for growth. Comparisons highlight the pain: In 2023, rates averaged 10.2% during a 6.25% repo era; today’s stability masks a 75 bps effective hike in real terms.
Yet, silver linings emerge. The RBI’s October circular proposes an “enabling framework” for banks to finance corporate acquisitions, targeting big-ticket loans over Rs 500 crore. This could inject Rs 2-3 lakh crore into M&A activity by FY26, per Kotak Institutional Equities estimates. For smaller players, the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) cover has been hiked to 90% for women-led ventures, drawing 20% more applications in Q3. “We’ve seen a 15% uptick in disbursals post-budget,” said an ICICI Bank executive, attributing it to fiscal prudence signals like the non-inflationary Union Budget 2025.
Real-world reactions underscore the divide. In Bengaluru’s startup hub, fintech lender Capital Float reported 25% YoY growth in disbursals, but founders complain of “rate fatigue.” A poll by Business Standard on X showed 62% of 10K respondents expecting cuts only in Q1 2026. Meanwhile, rural branches of Punjab National Bank (PNB) buzz with inquiries for MSME loans under the Emergency Credit Line Guarantee Scheme (ECLGS) extension, which disbursed Rs 5.5 lakh crore by September 2025.
Broader Banking Reforms: AI, Basel III, and the Push for Credit Expansion
Beyond rates, the October review unpacked structural shifts. The RBI mandated stricter Basel III norms, requiring banks to hold 100% provisions on unrealized losses from government securities – a nod to 2023’s Adani-linked volatility. “This fortifies resilience but could crimp margins by 20-30 bps,” warned CRISIL Ratings in a note. On the flip side, AI regulation got a green light: Banks can now deploy generative AI for fraud detection, with 40% of PSUs like Bank of Baroda piloting chatbots that flag suspicious transactions in real-time.
Credit growth remains the holy grail. Anemic at 13% despite India Inc’s peak financial health (debt-to-equity at 0.7x), the RBI nudged lenders toward corporate books. “Big-ticket loans make sense – NPAs here are sub-1%,” said an Axis Bank official. Data from the June FSR reveals 170 million new demat accounts since 2020, signaling retail confidence spillover into banking. Women-led accounts surged 30%, per Zerodha, tying into PMJDY’s 50 crore-plus linkages.
Comparisons with peers paint India as a bright spot. China’s banking NIMs have shrunk to 1.8% amid property woes, while US Fed’s 25 bps September cut sparked a 5% loan spike. India’s steady 5.5% repo, against the US’s 4.75-5%, underscores policy divergence. Public reaction? Mixed. A Livemint survey of 2,000 urban borrowers found 55% “neutral” on no-cut, but 70% of rural respondents via SMS polls urged faster transmission.
Looking Ahead: When Will Rates Budge, and What Borrowers Can Do Now
Forecasts point to a 25 bps cut in December 2025 if inflation stays below 2%, per Nomura. Until then, borrowers face a holding pattern. Tips from experts: Refinance via balance transfer offers (saving 0.5-1%) or opt for external benchmarks like MCLR-linked loans, now 85% of portfolios. For businesses, hybrid models – bank + fintech – yield rates under 12%, with 71% of digital loans bypassing Tier-1 cities.
In sum, the RBI’s hold isn’t inertia; it’s calibrated caution in a world of US tariffs and oil at $85/barrel. As Malhotra wrapped up, “Our system enters 2025 on strong footing.” For banks, it’s a cue to innovate; for borrowers, a reminder to budget tight.
Key Takeaways
- Stable EMIs Ahead: No repo cut means home and business loan rates hold at 8-15%, but real costs ease with 1.54% inflation.
- SME Boost Incoming: New acquisition financing framework could unlock Rs 2-3 lakh crore, prioritizing low-NPA corporate loans.
- Tech Edge for Resilience: AI fraud tools and Basel III norms strengthen buffers, with CRAR at 17.2% and NPAs at 2.3%.
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