Banks are likely to reduce lending and deposit rates gradually over the coming months as expensive legacy deposits mature and liquidity conditions stay comfortable, according to a CareEdge report. However, the report suggests that intense competition for retail deposits and lenders’ efforts to safeguard profitability could prevent any sharp decline in interest rates. The outlook indicates that while funding costs are easing, banks are expected to adopt a cautious approach in passing on the benefits to borrowers, resulting in only moderate movements in lending and deposit rates.
The CareEdge report said banks are entering a phase where older, higher-cost deposits are maturing, helping reduce overall funding expenses. At the same time, adequate liquidity in the banking system is expected to support a gradual decline in interest rates.
“Going forward, lending and deposit rates are expected to moderate gradually as legacy high-cost deposits continue to mature and liquidity remains comfortable. However, competition for retail deposits, banks’ focus on margin preservation and the pace of deposit repricing are likely to keep movements in both fresh and outstanding spreads relatively modest in the near term,” the report said.
According to the report, the easing of funding costs is likely to exert mild downward pressure on fresh lending spreads as the transmission of monetary policy continues. Even so, banks are expected to carefully balance lower funding costs with the need to protect their margins.
Bond Yields, RBI Measures Offer Additional Support
CareEdge Economics expects the benchmark 10-year government security (G-sec) yield to average between 6.8 per cent and 6.9 per cent during the year, assuming Brent crude averages around $ 90 per barrel. Lower bond yields could benefit banks by generating treasury gains, improving borrowing conditions in debt markets and lowering financing costs for companies.
The report also highlighted that several recent measures introduced by the Reserve Bank of India (RBI) have helped ease external financing pressures. These include incentives for FCNR(B) deposits, relaxed external commercial borrowing (ECB) norms for public sector undertakings, expansion of the Fully Accessible Route (FAR) for government securities, and tax exemptions for foreign institutional investors (FIIs) and foreign portfolio investors (FPIs).
The report noted that fresh lending rates of scheduled commercial banks (SCBs) stood at 8.51 per cent in May 2026, while fresh domestic term deposit rates were recorded at 5.84 per cent. As a result, the spread between fresh lending and deposit rates narrowed by 4 basis points compared with the previous month to 2.67 per cent.
Outstanding lending rates eased to 8.97 per cent, while outstanding deposit rates slipped to 6.57 per cent. This led to a slight widening in the outstanding spread to 2.40 per cent.
Despite the expectation of slower rate movements, bank lending activity continues to remain strong. As of June 15, 2026, bank credit expanded 17.7 per cent year-on-year to Rs 215.5 lakh crore, driven largely by retail segments such as gold and vehicle loans, along with sustained lending to micro, small and medium enterprises (MSMEs).
Deposits also maintained healthy momentum, increasing 12 per cent year-on-year to Rs 258.4 lakh crore, with time deposits accounting for the bulk of the growth.
(With agency inputs)