India's Public Banks Transmit Only 81 of 125 Basis Points of RBI Rate Cuts, Lagging Private and Foreign Peers

The Quick Take

• Public sector banks (PSBs) have passed on only 81 basis points of the 125 basis points of RBI repo rate cuts in this easing cycle, according to The Hindu BusinessLine
• Private sector banks and foreign banks have transmitted the rate cuts more fully, indicating that PSBs are protecting net interest margins by slowing deposit rate reductions
• The transmission gap has direct implications for loan affordability for RBI's primary constituency—SME and retail borrowers who predominantly bank with PSBs

The Hindu BusinessLine reported that India's public sector banks have transmitted only 81 basis points of the RBI's 125 basis points of repo rate cuts in the current easing cycle—a 44 basis point transmission shortfall. Fresh rupee loan rates at PSBs declined by 81 bps while the RBI reduced the repo rate by 125 bps in cumulative cuts, with private sector banks and foreign banks showing superior transmission. The gap reflects a structural feature of PSB balance sheets: government-owned banks have large legacy deposits at high fixed rates that must be honored before lending rate reductions can fully flow through, delaying the monetary policy transmission mechanism.

The transmission shortfall has direct implications for RBI's policy effectiveness. If the central bank's objective of rate cuts is to stimulate credit growth and economic activity, incomplete pass-through at PSBs—which collectively hold over 60% of Indian banking sector assets and serve the largest share of SME and retail borrowers—significantly reduces the real-economy impact of monetary easing. The RBI has historically expressed concern about transmission gaps and may use moral suasion or regulatory guidance to push PSBs toward faster pass-through in upcoming communications. Private and foreign banks' superior transmission also reveals that the PSB transmission lag is a choice driven by margin protection rather than an unavoidable structural constraint.

The forward signal is whether the RBI's Financial Stability Report or the next MPC minutes explicitly call out PSB transmission gaps and signal a supervisory response. Watch for any RBI circular directing banks to align their external benchmark-linked rates (EBLR) more promptly with policy rate changes. The macro variable is PSB deposit rate competition: if private banks begin competing more aggressively for deposits by raising rates, PSBs will face pressure from both the RBI and competitive dynamics to accelerate their lending rate reductions to maintain market share in the loan book.

Synthesized from 1 source.