A recent report indicates that the Reserve Bank of India's (RBI) rate cuts during the financial year 2025-26 have been only partially transmitted to borrowers. While lending rates have declined, the reduction has not fully mirrored the central bank's policy easing, suggesting incomplete pass-through.
Partial Transmission of Rate Cuts
The report highlights that despite the RBI's efforts to lower interest rates to stimulate economic growth, banks and financial institutions have not fully passed on the benefits to customers. The average lending rates have fallen, but the extent of the decline is less than the cumulative reduction in the repo rate.
Factors Behind Incomplete Pass-Through
Several factors contribute to this partial transmission. Banks often face constraints such as high deposit costs, the need to maintain net interest margins, and the prevalence of fixed-rate loans that reset slowly. Additionally, the competitive landscape and credit risk perceptions also play a role in determining how much of the rate cut is passed on.
The report notes that while new borrowers may benefit more from lower rates, existing borrowers with floating-rate loans see a gradual impact. The incomplete transmission is a concern for policymakers aiming to boost consumption and investment through monetary easing.
Implications for the Economy
The partial pass-through means that the intended stimulus from rate cuts may be diluted. Businesses and households may not get the full benefit of lower borrowing costs, potentially slowing down the recovery. The report suggests that further measures, such as improving bank balance sheets or encouraging competition, could enhance transmission.
Overall, while the RBI's rate cuts have led to some reduction in lending rates, the transmission remains imperfect. This underscores the need for structural reforms to ensure that monetary policy actions effectively reach the real economy.
