Banks pass on rate hikes, but go slow when rates fall; RBI study finds

RBI Study Finds Asymmetric Rate Transmission

A study by the Reserve Bank of India has found that banks transmit interest rate increases more fully than rate reductions. According to the findings, banks passed on 76.4 per cent of repo rate hikes to borrowers, compared with only 64 per cent of repo rate cuts. During tightening phases, lending rates rose sharply, while easing phases produced only limited declines. The study points to the complex mechanics of monetary policy transmission and notes that sectors such as MSMEs are particularly affected.

Why This Matters For Businesses

The asymmetry has direct implications for working capital and borrowing costs. When the RBI raises the repo rate, businesses can expect a relatively swift and substantial increase in their loan interest outgo. When the RBI lowers the repo rate, the benefit to borrowers is slower and smaller. For MSMEs, which typically operate on thin margins and rely on floating-rate credit, this pattern can compress cash flows during tightening cycles and delay relief during easing cycles.

The findings also matter for financial planning and budgeting. Entities that model interest costs on the assumption of full pass-through of rate cuts may overestimate savings. Conversely, they may underestimate the speed at which costs rise when policy tightens. This has knock-on effects for pricing decisions, contract negotiations and internal forecasts.

What To Watch Next

Businesses should monitor the pace of transmission rather than only the direction of the repo rate. The spread between policy rates and actual lending rates, as well as the timeline over which banks adjust their benchmark-linked loan rates, will indicate how much relief or burden actually reaches borrowers. Developments in MSME credit flows and any further RBI commentary on transmission efficiency are also relevant. The study does not specify corrective measures, so the practical impact will depend on how banks and regulators respond.

For complia…