Lending rates to start easing only in second half of FY'25: Report

The Reserve Bank of India is expected to ease liquidity conditions in FY'2024-25, but its impact on lending rates would be seen only in the second half of the fosca; 2024-25, India Ratings said in its outlook for FY' 2024-25.

“While fiscal and regulatory tightening will continue, monetary conditions starting with the banking system liquidity beginning to ease” said Soumyajit Niyogi, Director Core Analytical Group. “However, the overall lending rates are likely to remain elevated and easing, if any, will be visible only from 2HFY25 ”.

Bank deposit rates are unlikely to rise further. But the structural shift in the system will keep downward rigidity intact. Hence, banks’ lending rate is expected to remain high in FY’25 with some modest softening towards the end.


On the other hand, regulatory tightening and pricing dynamics in the capital market suggest the prevailing rates will continue and any decline in risk-free rates will be compensated by an increase in credit premium by widening of the credit spread and term structure, the ratings firm said. Commercial paper (CP) and certificates of deposits (CD) rates are expected to ease in sync with the easing of liquidity conditions and a constructive view on the monetary policy.

The expectation of easing of monetary conditions will be visible in the short-term rates according to the ratings firm. But long term yields in the banking system and bond markets would remain broadly at an elevated level,it said.

Given the expectation of limited supply of bonds and higher demand from investors, IndRa expects bond issues to be higher in FY’25 than in FY’24.

The consequence of increase in CIC is to be reflected in the banking system liquidity, which is already in deficit on an average. However, given the elections are scheduled during 1Q, the impact on the credit will be modest, as the first quarter is a lean season for credit. The agency expects government spending to gain traction in the starting of the new fiscal along with the Reserve Bank of India’s dividend transfer, said India Ratings.