External benchmark-linked lending rates (EBLR) have fully reflected the Reserve Bank of India's cumulative 125 basis point repo rate cuts implemented between February 2025 and May 2026, while deposit rates have adjusted at a slower pace, according to the latest data released by the central bank.
The figures show that borrowers with loans linked to external benchmarks have received the full benefit of the RBI's monetary easing. However, customers with loans linked to the marginal cost of funds-based lending rate (MCLR) continue to see a slower reduction in borrowing costs as banks gradually reprice their liabilities.
Policy Transmission Strongest For EBLR Loans
The RBI data showed that EBLR declined by the entire 125 basis points, matching the cumulative reduction in the repo rate during the current easing cycle. In comparison, the weighted average lending rate (WALR) on fresh rupee loans declined by 82 basis points, while the WALR on outstanding loans fell by 85 basis points. The median one-year MCLR, however, eased by only 35 basis points, indicating that policy transmission remains slower for loans linked to internal benchmarks.
The central bank's data suggests that monetary policy transmission continues to be most effective for loans linked to external benchmarks, where changes in the policy repo rate are passed on to borrowers more quickly.
Deposit Rates Continue To Adjust Gradually
The RBI noted that banks have been slower in reducing deposit rates despite the easing cycle. Fresh domestic term deposit rates declined by 78 basis points, while rates on outstanding deposits fell by 52 basis points, considerably lower than the reduction in the repo rate.
According to the central bank, deposit rates have adjusted more gradually because banks continue to compete aggressively for deposits even as liquidity conditions improve. Sustained credit demand has encouraged lenders to maintain relatively attractive deposit rates to mobilise funds, resulting in a slower decline in their overall cost of liabilities.
This gradual repricing has also delayed the transmission of lower policy rates to MCLR-linked loans, as MCLR is directly influenced by banks' funding costs.
MCLR Borrowers Yet To Receive Full Benefit
The data highlights the difference in the way various lending benchmarks respond to monetary policy changes. Since MCLR is based on banks' cost of funds rather than an external benchmark, borrowers whose loans remain linked to MCLR have received only limited relief despite the RBI's cumulative rate cuts.
As deposit costs continue to adjust slowly, banks have reduced MCLR by a much smaller margin than EBLR, meaning borrowers under older lending structures may continue to face relatively higher borrowing costs unless they switch to external benchmark-linked loans.
A Contrast With The Previous Tightening Cycle
The current easing cycle stands in sharp contrast to the monetary tightening phase between May 2022 and January 2025, when the RBI raised the repo rate by 250 basis points to combat inflation.
During that period, policy transmission was considerably faster across both lending and deposit rates. EBLR increased by the full 250 basis points, while fresh domestic term deposit rates rose by 259 basis points and outstanding deposit rates climbed 206 basis points. The median one-year MCLR also increased significantly by 175 basis points.
The comparison suggests that banks typically pass on policy rate increases more quickly than rate reductions, particularly in the case of deposit rates, where competitive pressures often slow the transmission of monetary easing.
Implications For Borrowers And Banks
The latest RBI data reinforces the advantages of external benchmark-linked loans during periods of falling interest rates. Borrowers with EBLR-linked home, vehicle and business loans have benefited fully from the central bank's easing cycle, while those with MCLR-linked loans continue to experience a slower reduction in lending rates.
The data also highlights the balancing act for banks, which remain under pressure to attract deposits despite improving liquidity conditions. As long as competition for deposits remains intense, the transmission of lower policy rates to internal benchmark-linked loans is likely to remain gradual, even as EBLR borrowers continue to receive the full benefit of RBI's monetary policy easing. |
