RBI rate cuts partly passed on to borrowers in FY26

RBI's repo rate cuts in FY26 were only partially passed on to borrowers, with lending rates declining but not matching the full policy reduction. While weighted average lending rates fell by 93 basis points, the transmission varied across bank types and loan segments, leading to estimated borrower savings of Rs 19,000 crore.

The Reserve Bank of India's (RBI) interest rate cuts during FY26 were only partially passed on to borrowers, with lending rates declining but not to the same extent as the policy rate reduction, according to a report by Bank of Baroda.

The report noted that the RBI reduced the repo rate from 6.50 per cent to 5.25 per cent, a cut of 125 basis points, starting February 2025. The aim was to lower borrowing costs and support private investment. However, the transmission of this rate cut into actual lending rates was uneven across the banking system.

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It stated, "The cost of borrowing did come down during the course of the year, though not to the same extent of the repo rate cut of 125 bps".

It stated that banks also reduced deposit rates to maintain balance, which influenced lending benchmarks such as the Marginal Cost of Funds-based Lending Rate (MCLR).

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According to the report, the weighted average lending rate (WALR) on fresh loans declined by 93 basis points, showing partial transmission of the rate cuts. Meanwhile, the median MCLR fell by 45 basis points, indicating that benchmark lending rates adjusted more slowly.

The pace of transmission varied across different types of banks. Foreign banks saw the sharpest decline in lending rates, followed by private sector banks and then public sector banks. This variation was linked to the share of loans tied to external benchmarks.

The report highlighted that a higher share of loans linked to external benchmark lending rates (EBLR), especially in retail and MSME segments, led to faster transmission. Foreign banks had around 94 per cent of their loans linked to EBLR, followed by 89 per cent for private banks, while public sector banks had about 51 per cent.

Sector-wise, the impact of rate cuts differed significantly. The highest lending rates were seen in unsecured retail loans at 10.1 per cent, followed by agriculture loans at 9.81 per cent. In contrast, the lowest rate was for rupee export credit at 6.78 per cent.

Within retail loans, housing loans had relatively lower rates at 7.63 per cent, while vehicle and education loans were above 9 per cent.

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The transmission of rate cuts was strongest in segments like export credit and education loans, where lending rates fell by over 160 basis points. MSME loans and unsecured retail loans also saw significant declines, close to the repo rate cut. In contrast, sectors like agriculture, professional services and large industry saw much smaller reductions.

The report estimated that borrowers benefited from lower interest costs, with total savings of around Rs 19,000 crore across major sectors. Housing and MSME loans were the biggest beneficiaries of this reduction.

With the interest rate cycle nearing stability, only minor changes in lending rates are expected in the near term unless there is further clarity on the policy direction.