Here we unpack the key developments in the bond market for retail investors, exploring shifts in interest rates across loans, fixed deposits (FDs), and savings accounts, alongside movements in government and corporate bond yields following the RBI’s June rate cut. We also examine how liquidity in the banking system is influencing the short-term rates.
Rate cut transmission
The Reserve Bank of India began its current rate easing cycle in February 2025, lowering the repo rate by a cumulative 100 basis points to 5.5 per cent. This aggressive frontloading strategy is aimed to support economic growth amid continued moderation in consumer price inflation, which remains below the central bank’s target. Lower repo rates reduce banks’ borrowing costs, theoretically leading to reduced lending and deposit rates. For the monetary policy to be effective, these rate cuts must be transmitted efficiently to end users.
As per the RBI’s July 2025 bulletin, while banks have fully passed on the 100 basis point cut to external benchmark-linked lending rates, the marginal cost of funds-based lending rate has dropped by 10 basis points. Consequently, the weighted average lending rate on fresh and outstanding rupee loans fell by just 26 and 18 basis points, respectively, from February to May. Public sector banks saw the reduction in fresh rupee loan rates at 31 basis points, followed by private banks at 20 basis points and foreign banks at 49 basis points, revealing the varied pace of transmission.
Currently, SBI’s home loan rates start at 7.5 per cent, HDFC Bank at 7.9 per cent, ICICI Bank at 8 per cent, Axis Bank at 8.35 per cent, and Canara and Union Bank of India at 7.3 per cent each. Foreign banks like HSBC India offers 7.7 per cent onwards.
On the deposit front, rates have also moved lower. The weighted average term deposit rate on fresh deposits fell by 51 basis points, with outstanding deposits seeing only a marginal 2 basis point decline. Public, private, and foreign banks cut their deposit rates by 47, 41, and 56 basis points, respectively, as per the RBI report. During February to July, many leading banks adjusted their FD rates multiple times. SBI, for example, cut select rates by 10 basis points from July 15, third time since February, with its revised FD returns ranging from 3.05 to 6.45 per cent depending on tenure. Five-year deposit rates for major banks now stand at 6.6 per cent at ICICI Bank, 6.4 per cent at HDFC Bank and Bank of Baroda, 6.3 per cent at SBI, and 6.1 per cent at Punjab National Bank.
Savings deposit rates have also dropped, with several public sector banks offering historically low returns. SBI, HDFC Bank, and ICICI Bank currently offer just 2.5 per cent. In contrast, smaller banks like Yes Bank, Suryoday Bank, and IDFC First Bank are offering relatively higher savings rates, ranging from 2.5 to 7.75 per cent depending on the account balance.
Modest rise in longer yields
Following the June review, the RBI shifted to a neutral stance, signalling that the bulk of rate cuts may be behind us. Since then, bond yields — especially on the longer end — have started rising. The 10-year G-sec yield climbed from 6.25 per cent in May to 6.37 per cent by the end of July, while 10-year AAA-rated corporate bond yields rose from 6.9 per cent to 7.2 per cent. The term spread between 10-year G-secs and 91-day T-bills widened by 30 basis points, indicating a steeper yield curve.
Despite these yield movements, the RBI remains committed to maintaining surplus liquidity to support growth. Durable liquidity in the banking system is currently around 2 per cent of NDTL — a level typically seen only during crises such as the global financial meltdown or the Covid-19 pandemic. With a CRR cut scheduled for September expected to inject ₹2.5 lakh crore into the system, liquidity is likely to remain elevated. Through its variable rate reverse repo (VRRR) operations, the RBI aims to manage short-term rates while supporting broader transmission. Fund managers expect this liquidity glut to continue at least until March 2026.
Attractive short-term rates
Given the limited scope for further rate cuts, long-duration bonds have become less attractive. Following the June cut, yields on short-term instruments have softened. The 91-day T-bill yield declined from 5.6 to 5.4 per cent, while 3-month certificates of deposit and commercial paper yields dropped by around 30 basis points to 5.84 and 5.95 per cent, respectively.
This changing interest rate environment has had a noticeable impact on debt mutual fund performance too. Long-duration bond funds, such as gilt funds with 10 year constant duration, have seen their one-year returns fall sharply — from 11.7 per cent in May end to 9.6 per cent in July end. In contrast, short-duration strategies held up better. Low-duration and money market funds registered only a marginal decline of 10–20 basis points in returns, clocking one-year performances of 7.9 and 7.8 per cent, respectively, as of July 31, 2025.
Published on August 2, 2025
