Banks pass on rate hikes, but go slow when rates fall; RBI study finds
An RBI study reveals that Indian banks are slower to pass on interest rate cuts to borrowers than they are to pass on rate hikes. This behavior helps banks protect their net interest margins during easing cycles.
Why it matters
Understanding monetary policy transmission is critical for assessing how central bank decisions actually impact the cost of credit for businesses and consumers in the Indian economy.
MUMBAI: A study by RBI has found that interest rates adjust upward more completely during a tightening phase than they do downward during an easing phase.According to the study, published in RBI Bulletin, banks passed on 76.4% of the repo rate increase through contract repricing, with lending rates rising by 191 basis points following a 250-basis-point hike between March 2022 and Jan 2025.During the easing phase between Feb 2025 and March 2026, they passed on only 64% of the rate reduction, with lending rates falling by 80 basis points following a 125-basis-point cut.
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