RBI rate cycle: How much did borrowers and savers actually benefit?

The RBI's previous rate cycle shows that changes in the repo rate did not translate equally into loan and deposit rates, with the impact varying across borrowers and Depositors

A change in the repo rate does not necessarily translate one-for-one into loan rates.

Vrinda Goel New Delhi

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The Reserve Bank of India’s (RBI) 25-basis-point repo rate hike to 5.5 per cent on Wednesday marks a reversal after a prolonged easing cycle, with implications for both borrowers and depositors. For borrowers, it could mean higher loan rates, while depositors could eventually see better returns.

But the previous rate cycle offers an important lesson: a change in the RBI’s repo rate does not necessarily translate into an equal or immediate change in the rates offered by banks. Between February 2025 and September 2026, the RBI cut the repo rate by 125 basis points (bps). However, borrowers did not universally get a 125-bps reduction, nor did deposit rates fall by the same percentage points.

What happened to borrowers when RBI cuts rates?

The repo rate was slashed by 125 bps during the February 2025-September 2026 easing cycle. However, the average rate on fresh rupee loans fell by 72 bps, while the rate on outstanding rupee loans declined by 91 bps. The one-year median Marginal Cost of Funds-based Lending Rate (MCLR) fell by only 39 bps, showing that loans linked to internal benchmarks saw considerably slower transmission.

The data show that the 125-bps reduction in the RBI’s policy rate did not translate into an equal reduction in borrowing costs. The extent of the benefit also varied between new and existing borrowers, as well as across different types of loans and benchmarks.

New borrowers versus existing borrowers: Who benefitted more?

The difference between fresh and outstanding loan rates shows that existing borrowers, on average, saw a larger reduction in lending rates than those taking fresh loans during the easing cycle. The average rate on outstanding rupee loans fell by 91 bps, compared with a 72-bps decline in the rate on fresh loans.

The slower decline in fresh-loan rates was partly due to factors beyond the RBI’s policy rate. The RBI notes that fresh lending rates actually firmed by 21 basis points during H1FY27 despite no change in the repo rate, partly because credit demand was strong and credit growth was running ahead of deposit growth. This shows that bank pricing is influenced by more than the repo rate alone.

Did depositors see rates fall faster than borrowers?

The same easing cycle also affected depositors, although the impact was different. The weighted average domestic term-deposit rate (WADTDR) on fresh deposits fell by 95 bps, while the rate on outstanding deposits declined by 53 bps between February 2025 and August 2026.

The decline was sharper for fresh deposits than for fresh loans. While the average rate on fresh rupee loans fell by 72 bps, the rate on fresh term deposits fell by 95 bps, meaning banks reduced rates on new term deposits by more than they reduced rates on new loans during the easing cycle. For consumers, this meant that a borrower taking a new loan and a saver opening a new fixed deposit experienced the easing cycle differently.

Why did some borrowers get faster relief than others?

The speed and extent of transmission depended on the benchmark to which a loan was linked. Loans linked to an external benchmark, including the repo rate, respond more quickly to policy-rate changes, while MCLR and other legacy internal benchmarks have longer reset periods, slowing transmission.

According to the RBI data, 68.2 per cent of outstanding floating-rate loans were linked to external benchmarks at end-June 2026, while 29.6 per cent were linked to MCLR. At June-end 2026, External Benchmark Lending Rate (EBLR)-linked loans accounted for 90.8 per cent of outstanding floating-rate loans at private banks, compared with 53.6 per cent at public sector banks and 94.7 per cent at foreign banks. As a result, borrowers with externally benchmarked loans were more likely to see rate cuts reach them faster, while those with MCLR-linked loans could see slower and smaller changes.

Did the bank matter?

Yes. The extent to which an RBI rate cut was passed on to borrowers also varied by the type of bank they borrowed from. According to the RBI data, transmission of lending rates was stronger at private banks (PVBs) than at public-sector banks (PSBs), while foreign banks recorded the strongest pass-through. The RBI attributes this partly to the larger share of externally benchmarked lending at private banks, which can facilitate faster transmission.

For borrowers, this means the impact of an RBI rate change can depend not only on the policy decision and the benchmark linked to the loan, but also on the bank.

Who benefitted most from the RBI's easing cycle?

The variation in transmission becomes clearer when lending rates are compared across loan categories. Data for February 2025 to August 2026 show that lending rates declined by different amounts across sectors.

Among fresh loans, education loans saw the sharpest decline, with rates falling by 146 bps. Fresh MSME loan rates fell by 115 bps, followed by vehicle loans at 110 bps and housing loans at 109 bps. Fresh personal loan rates declined by 86 bps. For borrowers with existing loans, the decline was different. Rates on outstanding housing loans fell by 124 bps, while education loans declined by 123 bps and MSME loans by 102 bps.

The RBI said the transmission of policy-rate changes across sectors was heterogeneous because loan portfolios have different proportions of fixed- and floating-rate loans, while banks also charge different spreads. Changes in the mix of loans across higher- and lower-interest-rate slabs can also affect the overall lending rate.

Why did loan rates not fall as much as the repo rate?

A change in the repo rate does not necessarily translate one-for-one into loan rates. There are several reasons for this. First, not every loan is directly linked to the repo rate or another external benchmark. MCLR-linked loans can take longer to reflect changes in the benchmark rate.

Second, banks can change the spread they charge over the benchmark. During the easing cycle, the RBI noted that private banks increased spreads over the repo rate for housing, education, MSME and vehicle loans, which partly offset the benefit of lower policy rates for borrowers. Finally, banks’ funding costs, competition for deposits and demand for credit can also influence lending rates. As a result, even when the benchmark rate falls, the final rate charged to a borrower may not fall by the same amount.