RBI Rate Cut Impact: Borrowers Gain in FY26, but Banks Withhold Full Benefit; BoB Report Reveals Partial Transmission

The benefits of the Reserve Bank of India’s (RBI) aggressive monetary easing during the 2025-26 fiscal year (FY26) have finally reached the common man and corporate sectors, though not in their entirety. According to a recent economic analysis by Bank of Baroda, while the RBI slashed the repo rate by a cumulative 125 basis points (1.25%) since February 2025, commercial banks have only partially passed these savings on to borrowers.

The Math: Repo Rate vs. Lending Rates

To stimulate private investment and lower borrowing costs, the RBI moved the repo rate from 6.50% down to 5.25%. However, the report highlights a significant gap in how banks adjusted their rates:

• Weighted Average Lending Rate (WALR): Interest rates on fresh loans declined by 93 basis points, showing a healthy but incomplete transmission.
• Median MCLR: The Marginal Cost of Funds-based Lending Rate adjusted much more slowly, falling by only 45 basis points.
• The Verdict: Borrowers saw significant relief, but the reduction in lending rates failed to match the full 125 bps cut initiated by the central bank.

Which Banks Led the Rate Cut?

The pace of transmission was largely dictated by how many loans were tied to External Benchmark Lending Rates (EBLR).

1. Foreign Banks: Saw the sharpest decline, with 94% of their loan books linked to external benchmarks.
2. Private Sector Banks: Followed closely, with approximately 89% EBLR-linked loans.
3. Public Sector Banks (PSBs): Transmission was slowest here, as only 51% of their loans are tied to external benchmarks, with the rest relying on internal cost-based markers (MCLR).

Sector-Wise Interest Rate Breakdown

The impact of the rate cuts varied significantly across different categories of credit:

• Cheapest Credit: Rupee Export Credit stands at the lowest at 6.78%.
• Housing Loans: Homebuyers benefited well, with average rates hovering around 7.63%.
• Most Expensive: Unsecured retail loans (10.1%) and agricultural loans (9.81%) remain on the higher side.
• Maximum Relief: Export credit and education loans saw massive drops of over 160 basis points, actually exceeding the repo rate cut in some instances.

The Bottom Line: ₹19,000 Crore in Savings

Bank of Baroda estimates that the partial transmission of these rate cuts resulted in total interest savings of approximately ₹19,000 crore for borrowers across major sectors. The Housing and MSME segments emerged as the biggest beneficiaries of this downward trend in interest costs.

Outlook

As the interest rate cycle nears a point of stability, the report suggests that further significant drops in lending rates are unlikely in the near term unless the RBI provides further policy clarity. For now, borrowers can enjoy the reduced costs, even if the “full” benefit remains locked in the banking system’s operational margins.

Disclaimer: This report is based on the Bank of Baroda research paper and current banking data available as of May 2026. Interest rates are subject to change and vary depending on individual banks, credit scores, and loan categories. Please consult your financial advisor before making significant credit decisions.