Banks pass on 93 bps rate cut to borrowers against RBI's 125 bps repo reduction: RBI Bulletin

Banks reduced their weighted average lending rate on fresh loans by 93 basis points between February 2025 and March 2026. This shows that monetary-policy easing reached borrowers, but not in full. The RBI had cut its policy repo rate by a cumulative 125 basis points over the same period.

The difference was 32 basis points. Put another way, the lending-rate reduction represented about 74.4% of the RBI’s repo-rate cut. The RBI study found that 80 basis points came from actual interest-rate changes, while 13 basis points resulted from shifts in the composition of bank credit.

This partial transmission means new borrowers generally saw lower lending rates, though the reduction was smaller than the RBI’s policy move. The Bulletin uses the result to show why lending-rate changes must be assessed through both repricing and changes in the types of loans banks provide.

A basis point, abbreviated as bps, is a small unit used to describe changes in interest rates. One basis point equals 0.01 percentage point, or one hundredth of a percentage point. This avoids confusion when discussing relatively small rate movements.

Using that conversion, 93 basis points equals 0.93 percentage points. The RBI’s 125-basis-point repo-rate reduction equals 1.25 percentage points. Thus, the change in banks’ lending rates was 0.93 percentage points, compared with the RBI’s 1.25-percentage-point policy reduction.

The distinction matters because percentage points and percent changes are not identical. Here, the Bulletin compares rate movements directly in basis points. The figures show that banks’ fresh-loan rates declined substantially, but by less than the RBI’s cumulative repo-rate reduction during the stated period.

The RBI reduced its policy repo rate by a cumulative 125 basis points between February 2025 and March 2026. That equals a 1.25-percentage-point reduction. It was a substantial easing move intended to influence financing conditions across the banking system.

During the same period, the weighted average lending rate on fresh loans declined by 93 basis points, or 0.93 percentage points. Dividing 93 by 125 shows that roughly 74.4% of the RBI’s rate reduction appeared in the fresh-loan lending-rate measure. The remaining difference was 32 basis points.

The RBI study separates the 93-basis-point decline into an 80-basis-point interest-rate effect and a 13-basis-point composition effect. This means the headline lending-rate fall reflected both loan repricing and changes in the mix of credit issued by banks, not just a direct policy-rate pass-through.

The weighted average lending rate, or WALR, on fresh loans summarizes the average rate banks charge on newly issued credit. “Weighted” means loans contribute according to their importance in the overall lending mix. It helps show how policy changes reach borrowers across the banking system.

The RBI study found that this rate fell by 93 basis points. An 80-basis-point interest-rate effect came from changes in the rates charged on loans. A further 13-basis-point composition effect came from shifts in the types of borrowers, banks and sectors represented in new credit.

This distinction matters because an aggregate lending rate can fall even when every individual loan rate does not decline equally. For example, a larger share of relatively lower-rate loans could reduce the average. The Bulletin therefore treats both loan repricing and credit composition as important parts of monetary-policy transmission.

When banks reduce lending rates after a central-bank cut, borrowers usually face lower interest costs on eligible new or repriced loans. This can make home loans, business borrowing and other credit more affordable. Lower costs may improve household cash flow and encourage firms to finance investment or working capital.

For example, a company considering a new loan may find that a lower interest rate makes an expansion project easier to afford. More borrowing can support demand for goods and services. Banks may also see stronger loan demand if customers respond to cheaper credit, although the article does not quantify such a response.

The wider effect depends on actual transmission. In the RBI data, fresh-loan rates fell 93 basis points against a 125-basis-point repo cut. That partial pass-through suggests borrowers benefited, but the full potential boost from policy easing may take longer or remain limited if lending rates adjust gradually.

A repo-rate cut influences banks, but it does not automatically determine every lending rate. Banks also consider the cost of raising funds, borrower risk, operating expenses, competition and the need to preserve a sustainable margin. These factors can make the reduction in customer rates smaller than the policy-rate move.

The RBI’s study highlights another mechanism: composition. The 93-basis-point fall in fresh-loan WALR included an 80-basis-point interest-rate effect and a 13-basis-point composition effect. If the shares of loans across banks or sectors change, the overall average can move even without an identical rate change on every loan.

Timing can matter too, because loans may reprice at different speeds. The Bulletin’s figures show partial transmission: banks passed on 93 basis points against the RBI’s 125-basis-point repo cut. The result reflects both actual repricing and changes in the credit mix during the period.

The RBI repo rate is the policy interest rate at which the central bank lends funds to banks against eligible securities. It is a key signal for monetary policy. Raising it generally makes funds more expensive for banks, while lowering it generally supports easier funding conditions.

In practice, a lower repo rate can reduce banks’ marginal funding costs and encourage them to lower lending rates. Banks then transmit the change through rates on new loans or loans that are due for repricing. The strength and speed of this process depend on each bank’s funding structure, competition and loan portfolio.

The Bulletin provides a concrete result. The RBI cut the repo rate by 125 basis points between February 2025 and March 2026, while WALR on fresh loans declined by 93 basis points. This shows that policy changes influence customer rates, but transmission may be incomplete or uneven.