Fresh Lending Rates Fall 93 Bps Following RBI’s 125 Bps Repo Rate Cuts, October Bulletin Shows

Indian commercial banks transmitted a sizable portion of the central bank’s monetary policy easing to new borrowers, with the weighted average lending rate (WALR) on fresh rupee loans dropping by 93 basis points (bps) against a cumulative 125 bps reduction in the policy repo rate.

The findings, published in the Reserve Bank of India’s (RBI) October 2026 Bulletin, evaluate the policy easing cycle conducted between February 2025 and March 2026, during which the Monetary Policy Committee (MPC) lowered the benchmark repo rate from 6.50 per cent to 5.25 per cent.

Price Versus Composition Effects

The research paper, titled “Transmission to Lending Rates of Scheduled Commercial Banks: Price versus Composition Effects in WALR” and authored by Yuvraj Kashyap, Kamal Gupta, and Arvind Jha, decomposed changes in lending rates using an index-number framework.

The analysis found that aggregate loan rate reductions do not solely mirror pure rate cuts, but also reflect structural shifts in loan portfolios:

• Direct Interest Rate Effect: Contributed 80 bps to the decline, capturing direct loan repricing by scheduled commercial banks.
• Credit Composition Effect: Accounted for the remaining 13 bps of the drop, driven by reallocations of fresh disbursements toward lower-yielding, higher-rated borrowers and priority credit segments.

The central bank emphasized that evaluating both price actions and portfolio shifts provides a clearer understanding of how monetary policy permeates the broader real economy.

The Role of EBLR and MCLR

The rapid pace of transmission on fresh disbursements underscores the growing share of the External Benchmark Lending Rate (EBLR) mechanism introduced for retail and MSME loans. Because EBLR-linked contracts adjust dynamically to repo rate adjustments, fresh corporate and retail borrowers captured substantial savings rapidly.

In contrast, outstanding loan books saw a more gradual repricing process. The median Marginal Cost of Funds-based Lending Rate (MCLR), which governs older corporate and non-retail credit portfolios, adjusted at a slower pace as bank deposit costs repriced with a lag over annual reset cycles.

Private sector lenders led the transmission race on fresh loan advances due to their higher share of floating benchmark facilities, while public sector banks adjusted their lending rates more gradually.

Implications for Borrowers and Markets

The lower cost of fresh credit provides significant relief across retail and corporate borrowing categories:

• Retail Borrowers: Home and vehicle loan borrowers benefit from reduced equated monthly installments (EMIs) or truncated tenure terms, unlocking disposable income.
• MSMEs and Industry: Competitive lending rates reduce working capital charges and encourage businesses to initiate fresh capital expenditure.
• Banking Margins: Net interest margins (NIMs) for commercial lenders face near-term margin pressure as lending yields adjust faster than term deposit liabilities.

With the repo rate paused at 5.25 per cent following the aggressive easing cycle, domestic businesses and markets continue to absorb the tailwinds of cheaper borrowing costs across industrial and service sectors.

Tags: Reserve Bank of India Banking Sector Monetary Policy Committee Scheduled Commercial Banks Credit Markets