A report by Bank of Baroda indicates that interest rate cuts by the Reserve Bank of India during FY26 were only partly passed on to borrowers, resulting in a slower decline in lending rates compared to the reduction in the policy rate.
The central bank reduced the repo rate by 125 basis points—from 6.50 per cent to 5.25 per cent—starting February 2025, with the objective of lowering borrowing costs and supporting private investment. However, the report observed that the transmission of these cuts across the banking system remained uneven.
While borrowing costs did decline over the year, they did not mirror the full extent of the policy easing. The weighted average lending rate (WALR) on fresh loans dropped by 93 basis points, reflecting partial transmission. Meanwhile, the median Marginal Cost of Funds-based Lending Rate (MCLR) declined by just 45 basis points, indicating a slower adjustment in internal benchmarks.
Banks also trimmed deposit rates during the period to maintain balance sheets, which in turn influenced lending benchmarks such as MCLR.
Transmission Uneven Across Banks And Sectors
The report highlighted significant variation in the pace of transmission across different banking segments. Foreign banks recorded the sharpest fall in lending rates, followed by private sector lenders, while public sector banks showed the slowest adjustment.
This divergence was largely attributed to the proportion of loans linked to external benchmark lending rates (EBLR). Foreign banks had nearly 94 per cent of their loan portfolios tied to EBLR, compared to 89 per cent for private banks and about 51 per cent for public sector banks, leading to faster transmission where such linkages were higher.
Sector-wise, lending rate trends also differed widely. Unsecured retail loans carried the highest interest rates at 10.1 per cent, followed by agriculture loans at 9.81 per cent. In contrast, rupee export credit saw the lowest rates at 6.78 per cent.
Within retail lending, housing loans remained relatively affordable at 7.63 per cent, while vehicle and education loans were priced above 9 per cent.
The report noted that transmission was strongest in segments such as export credit and education loans, where rates declined by more than 160 basis points. MSME and unsecured retail loans also saw notable reductions, broadly in line with the repo rate cut. However, sectors like agriculture, professional services and large industry experienced more modest declines.
Overall, borrowers benefited from lower interest costs, with estimated savings of around Rs 19,000 crore across key sectors. Housing and MSME loans emerged as the primary contributors to these savings.
With the rate cycle nearing stability, the report suggested that only marginal changes in lending rates are likely in the near term, unless there is further clarity on the monetary policy trajectory. |
