Banks Hesitate to Lower Rates Despite Recent Hikes
MUMBAI: A recent study by the Reserve Bank of India (RBI) reveals that banks are more effective at passing on interest rate hikes than cuts. The research, published in the RBI Bulletin, indicates that during tightening phases, banks transmitted 76.4% of repo rate increases, while only 64% of rate reductions were passed on during easing phases.
The study examined the period from March 2022 to January 2025, where banks raised lending rates by 191 basis points following a 250-basis-point hike. In contrast, during the easing phase from February 2025 to March 2026, lending rates fell by just 80 basis points after a 125-basis-point cut. The report, titled ‘Transmission to Lending Rates of SCBs: Price versus Composition Effects in WALR’, emphasizes that the weighted average lending rate (WALR) reflects both changes in lending rates and shifts in loan-book composition.
While the pass-through of monetary policy to contracted loan rates was lower during the easing cycle, the disparity narrowed when considering the headline WALR. The pass-through during easing was 74.4%, compared to 72.4% during tightening. The study noted that a 250-basis-point hike led to an 181-basis-point increase in WALR, while a 125-basis-point cut resulted in a 93-basis-point decline.
During easing cycles, banks tend to protect their net interest margins by adjusting spreads or favoring higher-yielding loans, which weakens the transmission of rate cuts. In March 2026, fresh lending rates increased by 12 basis points despite the easing stance, according to RBI researchers Yuvraj Kashyap, Kamal Gupta, and Arvind Jha.
The study also highlighted the impact on micro, small, and medium enterprises (MSMEs), which saw the most significant effect on fresh-loan WALR. Rates for MSMEs fell by 122 basis points during the easing cycle, largely due to benchmark-linked repricing. This accounted for 118 basis points, reducing the system-wide WALR by 24 basis points, more than any other sector’s contribution. Education loan rates decreased by 162 basis points but had minimal impact on overall WALR due to their small credit share.
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