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Foreign banks have passed on the Reserve Bank of India's policy rate cuts to borrowers and depositors more effectively than public and private sector banks during the current easing cycle, according to the RBI's latest monthly bulletin. The data showed that foreign banks recorded the steepest reductions in lending as well as deposit rates across both fresh and outstanding accounts. The central bank also noted that the transmission of policy rate cuts remained particularly strong in sectors linked to repo-based lending, including infrastructure, reflecting the growing impact of external benchmark-linked lending norms.
The Reserve Bank of India (RBI) has said that foreign banks have shown the strongest transmission of its monetary policy easing during the current interest rate cut cycle, reducing both lending and deposit rates more sharply than public and private sector banks.
According to the RBI's monthly bulletin released earlier this week, scheduled commercial banks (SCBs) lowered their repo-linked external benchmark-based lending rates (EBLR) and marginal cost of funds-based lending rates (MCLR) during the easing cycle between February 2025 and May 2026. The central bank noted that the transmission of policy rate cuts to fresh lending rates remained particularly strong in infrastructure and other sectors where external benchmark-linked lending is mandatory.
The bulletin showed that foreign banks reduced the weighted average lending rate (WALR) on fresh rupee loans by 1.24 percentage points during the period. In comparison, private sector banks reduced fresh lending rates by 1.08 percentage points, while public sector banks recorded a reduction of 0.66 percentage points.
A similar trend was seen in outstanding rupee loans. Foreign banks reduced weighted average lending rates by 1.20 percentage points, followed by private sector banks with a 0.98 percentage point reduction and public sector banks with a 0.81 percentage point decline.
The transmission of policy easing was also stronger on the deposit side. Foreign banks reduced weighted average domestic term deposit rates (WADTDR) on fresh deposits by 0.91 percentage points, compared with 0.74 percentage points by private sector banks and 0.73 percentage points by public sector banks.
For outstanding domestic term deposits, foreign banks again recorded the highest reduction at 0.90 percentage points. Private sector banks reduced rates by 0.46 percentage points, while public sector banks lowered them by 0.53 percentage points.
The RBI further highlighted that it has reduced the repo rate by a cumulative 1.25 percentage points during the current easing cycle. The rate was lowered by 0.25 percentage points each in the February and April monetary policy reviews, followed by a 0.50 percentage point reduction in the June policy review and another 0.25 percentage point cut in the monetary policy announced in December.
However, the central bank kept the repo rate unchanged during the monetary policy reviews held in August, October and February 2026, indicating a pause after successive rate reductions.
The stronger transmission by foreign banks reflects how quickly policy rate changes are being passed on through external benchmark-linked lending, a framework introduced by the RBI to improve the effectiveness of monetary policy. Over the past few years, the central bank has encouraged banks to link more retail and MSME loans to external benchmarks such as the repo rate, helping ensure faster transmission of policy decisions to borrowers.
Source PTI
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