The transmission of monetary policy changes to bank lending rates remains uneven, with borrowers seeing faster increases in loan rates during tightening cycles than reductions during easing cycles. A study published in the RBI Bulletin found that banks passed on 76.4% of repo rate hikes through changes in contracted lending rates, compared with 64% of repo rate cuts.
Between March 2022 and January 2025, the RBI raised the repo rate by 250 basis points, leading to a 191-basis-point increase in contracted lending rates. In contrast, during the easing phase from February 2025 to March 2026, a 125-basis-point repo rate cut resulted in an 80-basis-point decline in contracted lending rates.
The study, titled ‘Transmission to Lending Rates of SCBs: Price versus Composition Effects in WALR’, explains that the weighted average lending rate (WALR) reflects both changes in interest rates and shifts in banks’ loan portfolios.
When loan composition is considered, the difference in rate transmission narrows. During the tightening phase, the 250-basis-point repo rate hike led to a 181-basis-point increase in WALR. During the easing phase, a 125-basis-point cut resulted in a 93-basis-point decline in the average lending rate. This puts the pass-through at 72.4% during tightening and 74.4% during easing.
The study notes that banks may protect their net interest margins (NIMs) during easing cycles by increasing spreads or shifting towards higher-yielding loans. This can limit the impact of rate cuts on borrowers. In March 2026, fresh lending rates increased by 12 basis points despite the easing stance.
RBI researchers Yuvraj Kashyap, Kamal Gupta and Arvind Jha also examined how different loan categories influenced lending rates.
MSME loans had the largest impact on fresh-loan WALR during the easing cycle. Their lending rates fell by 122 basis points, close to the 125-basis-point repo rate cut. Benchmark-linked repricing accounted for 118 basis points of this decline, reducing the system-wide WALR by 24 basis points, more than 2.6 times the contribution of any other sector.
Education loan rates recorded the steepest decline at 162 basis points but had almost no impact on the overall WALR decline due to their small share of total credit. Rupee export credit rates fell by 161 basis points, contributing just 5 basis points to the decline.
Meanwhile, large-industry lending rates declined by 67 basis points, contributing 9 basis points to the overall reduction. However, a positive weight effect of 9 basis points, reflecting shifts towards higher-spread loans or lenders, partly offset the downward pressure on lending rates.
Also read: Viksit Workforce for a Viksit Bharat
Do Follow: The Mainstream LinkedIn | The Mainstream Facebook | The Mainstream Youtube | The Mainstream Twitter
About us:
The Mainstream is a premier platform delivering the latest updates and informed perspectives across the technology business and cyber landscape. Built on research-driven, thought leadership and original intellectual property, The Mainstream also curates summits & conferences that convene decision makers to explore how technology reshapes industries and leadership. With a growing presence in India and globally across the Middle East, Africa, ASEAN, the USA, the UK and Australia, The Mainstream carries a vision to bring the latest happenings and insights to 8.2 billion people and to place technology at the centre of conversation for leaders navigating the future.