Banks Lag Behind: Only 93 bps Passed to Borrowers Against RBI's 125 bps Cut
RBI Bulletin reveals banks passed on 93 basis points of lending rate cuts against a 125 bps repo rate reduction between Feb 2025 and March 2026.
While the Reserve Bank of India (RBI) aggressively lowered the policy repo rate to ease the financial burden on borrowers, banks did not pass on the full benefit. According to the RBI's October 2026 Bulletin, banks implemented bank lending rate reductions of 93 basis points (bps), falling short of the cumulative 125 bps cut initiated by the central bank between February 2025 and March 2026.
Breaking Down the Transmission Gap
The RBI's latest data reveals a gap in how monetary policy easing reaches the end consumer. The Weighted Average Lending Rate (WALR) on fresh loans saw a decline of 93 bps during the specified period. This transmission was not a simple one-to-one reduction but was driven by two distinct factors:
- Interest Rate Effect: A reduction of 80 bps came directly from the lowering of interest rates.
- Composition Effect: A 13 bps decline was attributed to shifts in the composition of bank credit.
The study, titled "Transmission to Lending Rates of SCBs: Price versus Composition Effects in WALR," emphasizes that aggregate lending rates are influenced not just by the repricing of loans, but also by changes in the types of credit banks provide across different sectors.
The State of the Indian Economy
Beyond lending rates, the Bulletin provides a comprehensive look at India's broader economic health. The "State of the Economy" section notes that India continues to show resilience, bolstered by strong high-frequency indicators in both the services and industrial sectors.
Global Headwinds and Inflation
Despite domestic strength, the RBI warned of external pressures. Renewed geopolitical instability in West Asia and disruptions in global supply chains have ramped up inflationary pressures worldwide. This has forced several major central banks to hike their own policy rates.
Domestically, India's headline Consumer Price Index (CPI) inflation saw an uptick in September. This rise was driven by a broad increase across core inflation, fuel, and food components.
External Sector and NBFC Performance
The external sector showed promising signs of growth. In the first half of FY27, merchandise exports grew by double digits, which helped in narrowing the trade deficit. Furthermore, August saw a strengthening of remittance flows, External Commercial Borrowings (ECB), and Foreign Direct Investment (FDI).
The non-banking financial company (NBFC) sector also reported positive trends. As of December 2025, the sector maintained double-digit credit growth. More importantly, asset quality improved, as evidenced by a decline in non-performing asset (NPA) ratios.
The RBI clarified that the views expressed in the Bulletin articles are those of the respective authors and do not necessarily represent the official position of the central bank.