According to a report by Bank of Baroda, borrowers got only partial benefit from the interest rate cut made by the Reserve Bank of India (RBI) during the financial year 2026. Lending rates came down, but not as much as the policy rate was cut. It has been reported in the report that RBI reduced the repo rate from 6.50 percent to 5.25 percent from February 2025, which was a reduction of 125 basis points. Its objective was to reduce the cost of borrowing and promote private investment.
However, the impact of this rate cut on real lending rates was not uniform across the banking system. The report said that the cost of borrowing decreased during the year, but not as much as the repo rate was reduced by 125 basis points. The report also mentioned that banks also cut deposit rates to maintain balance, which impacted lending benchmarks like Marginal Cost of Funds-Based Lending Rate (MCLR).
Reduction of only 0.93 percent
According to the report, weighted average lending rates on new loans declined by 93 basis points, which shows the partial impact of the rate cut. At the same time, the average MCLR declined by 45 basis points, which shows that the benchmark lending rates have been adjusted more slowly. The effect of rate cut was different in different types of banks. The biggest decline in lending rates was seen in foreign banks, followed by private sector banks and then government banks.
This difference was related to the share of loans that were linked to external benchmarks. The report emphasizes that due to the higher share of loans linked to external benchmark lending rates (EBLR), especially in the retail and MSME sectors, the impact of the rate cut was more rapid. About 94 percent of the loans of foreign banks were linked to EBLR, followed by 89 percent of the loans of private banks were linked to EBLR, while about 51 percent of the loans of public sector banks were linked to EBLR.
Different effects were seen in different sectors
Sectorally, the impact of the rate cut was quite varied. The highest lending rates were seen in retail loans without any guarantee, which were 10.1 percent, followed by agri loans, which were 9.81 percent. In contrast, the lowest rate was for export loans given in rupees, which was 6.78 percent.
Among retail loans, housing loan rates were relatively low at 7.63 percent, while vehicle and education loan rates were above 9 percent. The impact of the rate cut was most visible in segments like export credit and education loans, where lending rates were reduced by more than 160 basis points. MSME loans and retail loans without any guarantee also saw a significant decline, which was almost equal to the repo rate cut. In contrast, sectors such as agriculture, professional services and large industries saw much smaller cuts.
Saving of Rs 19 thousand crores
The report estimates that borrowers benefited from lower interest costs, resulting in overall savings of about Rs 19,000 crore across key sectors. Housing and MSME loans benefited the most from this cut. With the interest rate cycle approaching stabilisation, only modest changes in lending rates are expected in the near future until there is more clarity on the policy direction.
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