Indian banks increased interest rates on new term deposits to 5.99% in June, according to latest Reserve Bank of India data. Borrowing costs for fresh loans also saw a minor uptick to 8.53%. This shift indicates rising funding costs for banks even as the repo rate remains steady at 5.25%.
The Reserve Bank of India (RBI) reported a tightening in banking sector interest rates for June 2026. The weighted average domestic term deposit rate for scheduled commercial banks rose by 16 basis points, climbing to 5.99% from 5.83% in May. This adjustment suggests banks are actively competing for funds to maintain liquidity and support credit growth.
Impact on Lending and Borrowing Costs
While deposit rates saw a notable increase, borrowing costs for fresh rupee loans experienced a more modest rise. The weighted average lending rate on new loans moved up by 2 basis points to 8.53% in June, compared to 8.51% in the previous month. This difference between the rise in deposit rates and the change in lending rates highlights a pressure on bank profit margins, as the cost of attracting new deposits is growing faster than the rates charged to new borrowers.
In contrast to fresh loans, rates on outstanding loans showed stability, easing slightly to 8.96% in June from 8.97% in May. Additionally, the median marginal cost of funds-based lending rate (MCLR)—a benchmark often used to price retail and corporate loans—increased by 10 basis points to 8.60% in July. This upward trend in MCLR reflects the rising cost of funds that banks face, which eventually influences the interest rates paid by retail customers on home, auto, and personal loans.
Regulatory Context and Future Outlook
These adjustments in deposit and lending rates are occurring despite the RBI maintaining the repo rate at 5.25% for three consecutive meetings. The repo rate is the interest rate at which the central bank lends money to commercial banks. When the repo rate is held steady but deposit and lending rates continue to rise, it typically indicates that banks are responding to market-driven liquidity conditions and internal funding requirements rather than direct changes in central bank policy.
For investors, the key monitorable will be the impact of these rising deposit costs on the net interest margins (NIMs) of major banks in upcoming quarterly results. If the cost of funds continues to climb without a corresponding ability to pass on the full burden to borrowers, profit margins could come under pressure. Investors may track whether banks can sustain their current margins or if they will be forced to adjust their loan pricing more aggressively in the coming months.