Reserve Bank of India researchers Yuvraj Kashyap, Kamal Gupta, and Arvind Jha released a study confirming that banks move faster to raise rates than to lower them. The data shows a stark imbalance: during the tightening phase from March 2022 to January 2025, lenders passed on 76.4% of the 250-basis-point repo hike, pushing lending rates up by 191 basis points. But when the central bank cut rates by 125 basis points between February 2025 and March 2026, that pass-through dropped to just 64%. Lending rates fell only 80 basis points.
The gap isn't just about stubbornness; it's structural. The study, titled ‘Transmission to Lending Rates of SCBs: Price versus Composition Effects in WALR’, explains that banks protect their net interest margins (NIMs) during easing cycles. They do this by raising spreads or shifting loan books toward higher-yielding sectors. In March 2026, fresh lending rates actually rose 12 basis points despite the easing stance. This behavior weakens the transmission of monetary policy to the real economy.
Some sectors felt the pinch more than others. MSME loans saw the biggest impact on fresh-loan weighted average lending rates, with rates dropping 122 basis points during the easing cycle—still lagging slightly behind the 125-basis-point repo cut. Benchmark-linked repricing accounted for 118 basis points of that drop. Education loans saw the steepest fall at 162 basis points, but because these loans make up a tiny slice of the credit pie, they barely moved the overall system average. Rupee export credit rates fell 161 basis points, yet contributed just five basis points to the overall decline.
Large-industry rates fell 67 basis points, contributing nine basis points to the overall drop. A positive weight effect of nine basis points—reflecting a shift toward higher-spread loans—partly offset this pressure. The study highlights that while headline weighted average lending rates (WALR) showed a narrower gap (74.4% pass-through in easing vs 72.4% in tightening), the direct impact on contract rates remains significantly skewed against borrowers during rate cuts.
The next move is with the banking sector. As the RBI continues its easing cycle, pressure will mount on lenders to narrow the spread between repo rates and lending rates. Regulators may scrutinize NIM protection strategies more closely to ensure monetary policy reaches the end consumer. For now, borrowers in high-yield sectors like MSMEs and education can expect slower relief compared to the speed at which their debts increased.