The Asymmetry of Monetary Policy Transmission in India
The efficiency of monetary policy depends heavily on how quickly and completely the Reserve Bank of India (RBI) can influence the cost of credit in the broader economy. Recent research conducted by the central bank reveals a persistent challenge in this mechanism: an inherent asymmetry in how Scheduled Commercial Banks (SCBs) adjust their lending rates. Data indicates that banks are significantly more proactive in passing on repo rate hikes to borrowers during tightening cycles than they are in extending the benefits of rate cuts during easing phases.
This phenomenon is not merely a statistical anomaly but a structural characteristic of the Indian banking sector. During the tightening phase between March 2022 and January 2025, banks implemented a 76.4% pass-through of the repo rate increase, translating to a 191-basis-point rise in lending rates against a 250-basis-point cumulative hike. Conversely, in the easing phase between February 2025 and March 2026, the pass-through plummeted to 64%. Such disparities indicate that while the cost of borrowing rises rapidly when the RBI tightens liquidity, the relief provided to households and businesses during accommodative cycles is far more sluggish.
The Role of Loan-Book Composition and WALR
To understand these dynamics, it is essential to distinguish between the rates on contracted loans and the Weighted Average Lending Rate (WALR). The WALR is a broader metric that captures not only changes in specific interest rates but also shifts in the internal composition of a bank’s loan book. When researchers evaluate the headline WALR, the gap between tightening and easing transmission narrows, revealing a nuanced strategy employed by financial institutions.
While contracted rate adjustments show a clear preference for maintaining margins during easing cycles, the WALR figures suggest that banks often rebalance their portfolios to mitigate the impact of lower rates. If a bank’s average cost of funds falls, it may shift its lending mix toward higher-yielding assets to protect its Net Interest Margin (NIM). Consequently, even if the headline policy rate drops, the average interest rate charged by the bank may not fall in lockstep, as the “mix” of the loan book shifts to compensate for the lost revenue on legacy portfolios. This composition effect acts as a secondary lever that banks use to stabilize their financial performance in fluctuating interest rate environments.
Strategic Margin Management by Commercial Banks
The tendency of banks to “go slow” during rate cuts is driven by a clear business objective: the protection of Net Interest Margins. Banks operate under the pressure of balancing the interest paid on deposits with the interest earned on loans. In an easing cycle, deposit rates often exhibit stickiness; because banks want to retain their deposit base, they may be hesitant to lower interest payouts to customers as quickly as the repo rate declines. To offset this, they maintain higher spreads on their lending products for as long as possible.
The RBI study highlights that in March 2026, fresh lending rates actually rose by 12 basis points despite the overall easing policy. This underscores a situation where banks prioritize internal profitability metrics over the immediate transmission of macroeconomic policy. For corporate strategy teams and institutional borrowers, this signifies that market expectations regarding rate cuts must be tempered by an understanding of bank-level operational priorities. Banks are not merely conduits for RBI policy; they are profit-maximizing entities that adjust their product pricing to reflect their own funding costs and risk appetite.
Sectoral Nuances in Credit Transmission
The impact of monetary policy is not uniform across all categories of credit. The RBI data shows significant variation in how different segments of the economy experience changes in lending rates. Micro, Small, and Medium Enterprises (MSMEs) emerged as the primary beneficiaries of the easing cycle between February 2025 and March 2026, with their lending rates dropping by 122 basis points—nearly mirroring the 125-basis-point repo rate reduction. This high level of transmission is likely due to the widespread adoption of external benchmark-linked pricing for this segment, which forces an almost direct correlation between the repo rate and the cost of debt for smaller businesses.
In contrast, other sectors tell a different story. For instance, while education loan rates experienced a sharp decline of 162 basis points, their overall contribution to the system-wide reduction in WALR was negligible due to their small share in the total credit portfolio. Large-industry lending rates fell by only 67 basis points. In these areas, the “weight effect”—where banks shift toward higher-spread products or specific high-yield lenders—partially offsets the benefit of the policy rate cut. This indicates that while the RBI can effectively guide the cost of capital for specific policy-favored segments like MSMEs, large-scale industrial credit remains subject to internal bank pricing strategies that are less sensitive to policy shifts.
Implications for the Indian Financial Ecosystem
The persistence of this transmission asymmetry carries significant implications for the Indian economy. For borrowers, it highlights the importance of negotiating loan terms that are transparently linked to external benchmarks rather than internal bank marginal cost funds-based lending rates (MCLR) or other opaque pricing mechanisms. When rates are linked directly to the repo rate, the transmission is immediate and predictable. When they are not, the borrower remains vulnerable to the bank’s strategic decision-making process regarding NIM protection.
For policymakers, these findings suggest that mere adjustments to the repo rate may be insufficient to stimulate credit-led growth if the banking sector is structurally incentivized to dampen the transmission. Moving forward, the RBI may need to focus more on the “price versus composition” dynamic to ensure that the policy intent effectively reaches the end user. For the broader business community, the takeaway is clear: interest rate cycles are rarely symmetrical. Strategic financial planning must account for the reality that the cost of capital is likely to remain higher for longer during easing cycles than the headline policy rate might suggest, necessitating a proactive approach to debt management and liquidity sourcing.
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