Rate cuts transmission moderated in May 2026: RBI

Recent RBI data shows that the transmission of rate cuts to bank lending rates moderated in May 2026, meaning banks passed on a smaller share of the central ...

What Happened

Recent RBI data shows that the transmission of rate cuts to bank lending rates moderated in May 2026, meaning banks passed on a smaller share of the central bank's rate reduction to borrowers compared to earlier months.
The RBI increased the repo rate by 250 basis points between May 2022 and January 2025 (tightening cycle to combat post-pandemic inflation); it then reversed course and cut rates by a cumulative 85 basis points between February 2025 and April 2026.
While some of the rate cuts have reached borrowers, the pace slowed in May 2026, as banks adjusted their internal cost of funds more gradually than the policy rate change.
Deposit rates also fell, which reduces banks' cost of funds over time — but the adjustment is lagged, creating a timing mismatch in transmission.
The RBI has flagged incomplete and uneven transmission as a structural concern, particularly for MCLR-linked loan portfolios that change more slowly than External Benchmark Lending Rate (EBLR)-linked loans.

Static Topic Bridges

Monetary Policy Transmission Mechanism

Monetary policy transmission refers to the process by which changes in the central bank's policy rate (repo rate) flow through to actual lending and deposit rates in the economy, ultimately affecting investment, consumption, and inflation. Effective transmission is essential for monetary policy to achieve its intended macroeconomic objectives.

Transmission channels include: interest rate channel, credit channel, asset price channel, and exchange rate channel
In India, the interest rate channel is most relevant for the banking system
Transmission is considered "complete" when a 1 percentage point change in repo rate leads to a roughly equivalent change in bank lending and deposit rates
In practice, Indian banks — especially public sector banks — have historically exhibited "sticky" deposit and lending rates, slowing transmission

Connection to this news: The slowdown in transmission in May 2026 reflects the structural challenge of translating policy rate cuts into immediate relief for borrowers, particularly those on MCLR-linked loans.

Evolution of Lending Rate Benchmarks in India

India has gone through three successive regimes for bank lending rate benchmarking, each intended to improve transparency and speed of monetary policy transmission.

Base Rate system (2010–2016): First uniform floor for lending rates; replaced the prime lending rate system; but transmission remained sluggish
MCLR — Marginal Cost of Funds based Lending Rate (April 2016 onwards): Introduced by RBI to link lending rates to marginal funding cost; more responsive than base rate but transmission still incomplete; MCLR resets quarterly or annually depending on loan type, creating lags of 6–12 months
EBLR — External Benchmark Lending Rate (October 2019 onwards): RBI mandated that all new floating-rate retail and MSME loans be linked to an external benchmark (most banks chose the repo rate); EBLR resets at least once every three months; transmission to EMIs is now 1–3 months for EBLR-linked loans
As of 2024-25, a significant share of the banking system loan book still uses MCLR; this explains why aggregate transmission remains incomplete

Connection to this news: The moderation in May 2026 transmission partly reflects the share of MCLR-linked loans still in the system, which have not yet reset downward following the 85 bps of rate cuts since February 2025.

Repo Rate and Reverse Repo Rate — RBI's Liquidity Framework

The repo rate is the interest rate at which the RBI lends short-term funds to commercial banks against government securities under a repurchase agreement. The reverse repo rate (the rate at which RBI borrows from banks) is historically set 25 basis points below the repo rate, forming the floor of the Liquidity Adjustment Facility (LAF) corridor.

Repo rate as of June 2026: 5.25% (held unchanged after 85 bps of cuts since Feb 2025)
The LAF corridor includes: Standing Deposit Facility (SDF) at 5.00%, Repo at 5.25%, Marginal Standing Facility (MSF) at 5.50%
Rate-tightening cycle: RBI raised repo rate from 4.00% to 6.50% (250 bps) between May 2022 and January 2025
Rate-easing cycle: Repo rate brought down from 6.50% to 5.25% (85 bps) between February 2025 and April 2026
The RBI cut rates in FY25 and FY26 to support economic growth as inflation came under control

Connection to this news: The 85 bps of repo rate cuts are the source-side change; the RBI article documents how much of that has actually flowed through to bank rates by May 2026.

Asymmetric Transmission — Upward vs. Downward

A well-documented pattern in Indian banking is that rate hike transmission is faster than rate cut transmission — banks raise lending rates quickly when the RBI tightens, but are slow to pass on rate cuts. This asymmetry disadvantages borrowers during easing cycles.

Reasons for asymmetry: Banks are reluctant to cut deposit rates quickly (to avoid deposit outflows); their cost of funds therefore adjusts slowly; lending rates follow
The RBI has repeatedly flagged this in its monetary policy communications and surveillance reports
RBI introduced EBLR in 2019 precisely to address this: by linking to the repo rate externally, banks have less discretion to delay rate cuts
Deposits with fixed tenors (typically 1–5 years) also create balance-sheet stickiness — even when new deposits are priced lower, the existing stock reprices only at maturity

Connection to this news: The moderation in May 2026 transmission is consistent with this structural asymmetry — after an initial burst of transmission in Feb–April 2025 (following EBLR-linked loans repricing immediately), the incremental transmission slows as the remaining MCLR portfolio lags.

Key Facts & Data

Repo rate tightening: +250 basis points (May 2022 to January 2025; 4.00% → 6.50%)
Repo rate easing: −85 basis points (February 2025 to April 2026; 6.50% → 5.25%)
Current repo rate (June 2026): 5.25% (unchanged in June review)
MCLR introduced: April 2016 (replaced Base Rate)
EBLR (External Benchmark Lending Rate) mandatory for retail/MSME new loans: October 2019
EBLR transmission lag: 1–3 months; MCLR transmission lag: 6–12 months
SDF rate: 5.00%; Repo: 5.25%; MSF: 5.50% (June 2026 corridor)
RBI mandated under Section 45ZB of RBI Act 1934 to manage monetary policy through MPC