NEW DELHI: Monetary policy transmission during the ongoing easing cycle has gathered pace, with up to 92 basis points (bps) pass-through to lending rates and as much as 97 bps to deposit rates, according to the Reserve Bank of India (RBI).
The central bank noted that since the beginning of the rate easing cycle in February 2025, transmission to the weighted average lending rate (WALR) on fresh rupee loans has been robust, with a decline of 89 bps, while WALR on outstanding loans has fallen by 87 bps. The “interest rate effect” — a cleaner measure of pricing — has declined by 92 bps, indicating strong pass-through to new loans.
On the deposit side, the weighted average domestic term deposit rate (WADTDR) has declined by 97 bps for fresh deposits and 47 bps for outstanding deposits over the same period, reflecting significant transmission.
Since February 2025, the Reserve Bank of India (RBI) has reduced the repo rate by 125 basis point from 6.5% to 5.25%.
Mixed movement in recent months
In the second half of 2025-26, however, the transmission dynamics showed some divergence. The median one-year marginal cost of funds-based lending rate (MCLR) of scheduled commercial banks declined by 20 bps, while WALR on outstanding loans softened by 26 bps.
In contrast, WALR on fresh loans rose marginally by 5 bps during the period (up to February 2026), largely due to a compositional shift in credit towards sectors with relatively higher interest rates.
On the deposit side, WADTDR on outstanding deposits declined by 20 bps, while rates on fresh deposits increased by 4 bps, as banks stepped up efforts to mobilise funds amid strong credit demand.
EBLR share rises, aiding transmission
The RBI attributed the improved transmission largely to the rising share of external benchmark-based lending rate (EBLR)-linked loans. Their share in total outstanding floating rate loans increased to 65.4% as of December 2025 from 62.9% in June 2025.
Consequently, the share of MCLR-linked loans declined to 32.0%. Since EBLR loans are typically linked to the policy repo rate and reset faster, they enable quicker transmission of policy changes.
Private sector banks, which have a higher proportion of EBLR-linked loans, recorded stronger transmission compared to public sector banks, where MCLR-linked loans still account for a significant share. Foreign banks witnessed the highest pass-through, reflecting their greater reliance on external benchmarks.
Sectoral and structural factors at play
Transmission has been broad-based across sectors, though uneven. Public sector banks continue to have higher MCLR-linked exposure in segments such as agriculture, infrastructure, and large industry, which slows down the pace of rate adjustments.
Additionally, banks have increased spreads on repo-linked loans in certain segments—including education, MSMEs, and personal loans—partly offsetting the impact of policy rate cuts.
The RBI also highlighted that shifts in credit towards higher-yield segments have dampened the overall decline in lending rates, despite strong underlying transmission.
Deposit mobilisation pressures persist
The central bank pointed out that the gap between credit growth and deposit growth has prompted banks to raise deposit rates in recent months, particularly bulk deposits, even as the overall transmission trend remains downward.
Across bank groups, transmission to deposit rates has been slightly higher for public sector banks, although private banks showed stronger transmission in fresh retail deposits.
NBFCs complement credit delivery
Non-banking financial companies (NBFCs) continue to play a key role in extending credit to underserved segments, supporting the broader transmission of monetary policy. However, their lending rates remain higher than those of banks due to higher funding costs and borrower risk.
Margins remain stable
Despite the easing cycle, banks have managed to protect their net interest margins. Savings deposit rates have declined to their lowest levels since deregulation in June 2025, while the share of low-cost CASA deposits has moderated slightly.
Overall, the RBI said that while policy rate transmission has improved significantly during the current easing cycle, structural factors such as legacy loan benchmarks, sectoral credit shifts, and funding pressures continue to shape the pace and extent of pass-through.