The Reserve Bank of India's interest rate cuts are only partially reaching borrowers, according to the RBI's own data on lending rate transmission tracked through May 2026.

The Reserve Bank of India raised the repo rate by 250 basis points between May 2022 and January 2025, a sharp tightening cycle aimed at controlling inflation. Since then, it has reversed course, cutting the repo rate by 85 basis points between February 2025 and April 2026. The question now is how much of that easing has actually flowed through to the loans that households and businesses carry.

The answer, based on RBI data through May 2026, is: not fully. Transmission of rate cuts has moderated, meaning banks have passed on only a portion of the central bank's reductions to their lending rates. This gap between the policy rate and what borrowers actually pay is a core measure of how effectively monetary policy works in practice.

Why transmission slows down

Banks do not automatically lower lending rates the moment the RBI cuts the repo rate. Several factors slow the process. First, banks price loans based on their cost of funds, which includes deposits locked in at older, higher rates. Until those deposits mature and reprice, the funding cost stays elevated, limiting how much banks can reduce lending rates without squeezing their margins.

Second, credit risk appetite plays a role. If banks are cautious about defaults or are facing stressed assets, they tend to hold lending rates higher as a buffer. Third, the structure of loan books matters: fixed-rate loans do not reprice at all, while floating-rate loans linked to external benchmarks like the repo rate do adjust faster.

The 85 basis point cut since February 2025 is meaningful in size, but it is still less than a third of the 250 basis points added during the tightening phase. That asymmetry is itself a pattern seen in many banking systems: rate hikes tend to pass through quickly to borrowers, while cuts travel more slowly.

What this means for borrowers and markets

For retail borrowers, moderated transmission means home loan and personal loan rates have not fallen by the full amount the RBI has cut. Someone with a floating-rate home loan linked to an external benchmark would see faster relief, but those on older base-rate or MCLR-linked loans may see smaller or delayed reductions.

For businesses, especially small and mid-sized firms that depend on bank credit for working capital, slower transmission keeps borrowing costs higher than the policy rate alone would suggest. This can dampen investment and limit the stimulus effect the RBI intends when it cuts rates.

From a market perspective, the degree of transmission also shapes expectations about how many more cuts the RBI might need to deliver to achieve its growth and inflation goals. If each cut produces only partial relief in the real economy, the central bank may need to cut more aggressively or hold rates lower for longer to generate the same economic impact.

Deposit rates are the other side of this equation. Banks that are slow to cut lending rates are often also slow to cut deposit rates, which provides some protection for savers. But as the rate cycle extends, deposit rates will gradually move lower too, reducing returns for fixed-income investors and households relying on interest income.

The RBI's tracking of transmission through May 2026 will be watched closely by analysts to gauge whether the pace of pass-through is accelerating or stalling. A further slowdown would likely reinforce the case for additional rate action, while faster transmission would signal that the existing cuts are doing more work than the headline numbers suggest.