Reserve Bank of India Study Reveals Banks Transmit Monetary Policy Tightening More Effectively Than Easing to Lending Rates

Key facts

• The Reserve Bank of India (RBI) study found that banks transmit monetary policy changes more fully during a tightening cycle than during an easing cycle.
• During the tightening cycle between March 2022 and January 2025, banks passed on 76.4% of a cumulative 250-basis-point repo rate hike through contracted lending rates.
• The Weighted Average Lending Rate (WALR) increased by 181 basis points during the tightening cycle following a 250-basis-point repo rate hike.
• During the easing cycle between February 2025 and March 2026, banks transmitted 64% of a cumulative 125-basis-point repo rate cut to contracted lending rates.
• The WALR saw a decline of 93 basis points during the easing cycle following a 125-basis-point repo rate cut.
• Micro, small and medium enterprises (MSMEs) recorded the most significant impact on fresh-loan WALR during the easing cycle.
• MSME lending rates declined by 122 basis points between February 2025 and March 2026.
• MSMEs contributed 24 basis points to the overall decline in the banking system's WALR during the easing cycle.
• Education loan rates recorded the sharpest decline among analyzed segments, falling by 162 basis points during the easing cycle.
• In March 2026, fresh lending rates increased by 12 basis points despite the easing stance.