RBI finds borrowers get less relief from rate cuts than hikes
Bank lending passes monetary tightening faster than easing to borrowers.
Overview
Borrowers felt most of the pain when India’s central bank raised rates, but less of the relief when it cut them. From March 2022 to January 2025, the rose 250 and contracted lending rates climbed 191 points, a 76.4% pass-through. From February 2025 to March 2026, a 125-point cut reduced contracted rates by only 80 points, or 64%. This affects home-loan payments, consumer credit, working-capital costs and business investment.
The difference reflects how Indian banks price loans. Since 2019, new floating retail and small-business loans have been linked to , making changes clearer and faster. Older , , base-rate and loans can adjust more slowly. Deposit costs, bank margins, competition, liquidity and loan-book composition also matter. Headline WALR, an average affected by which loans banks hold, shows a smaller gap, so the finding does not mean every borrower is treated alike.
Timeline
RBI study reported slower lending-rate pass-through during easing than tightening
An report cited 76.4% pass-through of repo-rate hikes during the tightening phase and 64% pass-through of cuts during the subsequent easing phase. The comparison indicates that lending rates may respond more slowly to policy easing than to tightening, although the broader interpretation depends on the measure used.
RBI found headline WALR movements differed from contract-level repricing
The study distinguished contracted loan rates from the weighted average lending rate, or WALR, which reflects the average rate on a bank’s outstanding loan book or new lending. WALR rose 181 basis points during tightening and fell 93 basis points during easing. Because WALR includes changes in the mix of loans issued, it does not measure pure repricing alone.
Contracted lending rates fell by only 80 basis points during the 125-basis-point easing cycle
The RBI study found that loan contract rates declined 80 after policy rates fell 125 from February 2025 to March 2026. The resulting was 64%, materially below the 76.4% recorded during tightening. Slower relief can limit reductions in home-loan EMIs, consumer-credit costs, working-capital expenses, and business investment financing.
RBI analysis found that lending-rate transmission varies by benchmark and loan type
RBI analysis indicates that repo-linked loans generally transmit policy-rate changes faster than loans tied to , while may not change immediately. Transmission can also differ across borrower and loan categories, meaning policy easing may reach some households and businesses with a delay.
RBI found loan-book composition narrowed the apparent easing disadvantage
The RBI said changes reflected both price effects and , including shifts between loan categories with different rates and repricing patterns. When the headline measure was used, the pass-through gap was much narrower, at 72.4% during tightening and 74.4% during easing. This showed why average lending rates can tell a different story from the repricing of individual contracts.
RBI began an easing cycle after the tightening phase ended
The RBI entered a new policy phase in February 2025, eventually cutting the repo rate by 125 basis points through March 2026. The shift was intended to reduce financial pressure and support economic activity after the earlier tightening cycle. Borrowers with floating-rate loans expected their interest rates and to decline.
Contracted lending rates rose by 191 basis points during the 250-basis-point tightening cycle
RBI analysis found that contracted loan rates increased by 191 after the repo rate rose 250 . That represented 76.4% through contract repricing, showing substantial but incomplete transmission. The response differed across products because of benchmark rules, reset timing, bank spreads, and funding conditions.
RBI began a tightening cycle that raised the repo rate by 250 basis points
The RBI shifted from pandemic-era monetary support toward containing inflation and raised the by a cumulative 250 basis points during the . Higher benchmark rates increased borrowing costs for floating-rate households and businesses as loans reset.
Repo-linked loans began passing policy-rate changes to covered borrowers more visibly
made repricing of eligible floating loans more direct because the reference rate was outside an individual bank’s control. Borrowers with could see rate changes at scheduled resets, unlike many older or base-rate borrowers. The final interest rate still depended on the bank’s spread, credit risk assessment, reset schedule, and loan eligibility.
RBI required banks to link new floating retail and small-business loans to external benchmarks
Banks were required to benchmark new floating personal and retail loans, including housing and auto loans, and qualifying loans to , to an external rate such as the RBI or specified . Existing BPLR, base-rate, and MCLR loans generally continued until repayment or renewal. Banks retained discretion over spreads, while benchmark-linked rates had to reset at least quarterly.
RBI announced plans to move new floating loans from MCLR to external benchmarks
The RBI said banks would have to link new floating-rate personal, retail, and small-business loans to an . The decision followed evidence that internal benchmarks such as the base rate and MCLR had not delivered satisfactory transmission. s were intended to reduce banks’ discretion over the reference rate.
RBI introduced MCLR to make lending rates more responsive to marginal funding costs
The replaced the base-rate framework for new floating-rate loans. MCLR incorporated marginal funding costs and prescribed reset periods, aiming to make bank loan rates respond more quickly to monetary-policy changes. The RBI later found that transmission under internal benchmarks remained unsatisfactory.
RBI replaced the BPLR with the base-rate system to improve policy transmission
The became the minimum lending rate for most bank loans, with the goal of preventing opaque sub-base-rate pricing. The reform tied lending more closely to banks’ funding costs, but existing loans remained on older benchmarks and banks could adjust the slowly. Policy-rate changes still reached borrowers with delays.
RBI introduced the Benchmark Prime Lending Rate to make bank pricing more transparent
The BPLR replaced the earlier Prime Lending Rate framework as a common reference for bank lending. Banks were expected to price loans transparently around the benchmark, but borrowers still received loans below BPLR and the benchmark did not reliably reflect banks’ marginal funding costs. Transmission therefore remained incomplete.
RBI introduced a new lending-rate structure and later moved toward Prime Lending Rates
In September 1990, the RBI introduced lending rates linked to loan size, reducing the earlier complexity of rates. It later freed lending rates for larger loans and required banks to announce , but the system did not ensure uniform transmission of policy changes.