Weighted average lending rate on fresh rupee loans of banks rose 39 bps to 8.67 per cent in January 2026 from 8.28 per cent in December 2025
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The transmission of repo rate cuts into lending and deposit rates may be over, as interest rates on fresh loans went up even as interest rates on fresh deposits barely came down, going by RBI data for January 2026.
This development comes amid deposit growth (at 12.42 per cent year-on-year) lagging credit growth (14.40 per cent) as on January 31, 2026.
That transmission of the repo rate cuts into lending rates may have concluded can be gauged from the fact that the weighted average lending rate (WALR) on fresh rupee loans of scheduled commercial banks (SCBs) rose 39 bps to 8.67 per cent in January 2026 from 8.28 per cent in December 2025.
WALR in December 2025 had declined by 43 bps from 8.71 per cent in November 2025.
The Reserve Bank of India’s rate-setting monetary policy committee cumulatively reduced the policy repo rate by 125 basis points (bps) during the February-December 2025 period from 6.50 per cent to 5.25 per cent.
Madan Sabnavis, Chief Economist, Bank of Baroda, observed that banks may be upping the spreads on fresh loans linked to external benchmarks such as the repo rate, resulting in increase in the WALR of these loans. External benchmark-linked loans such as retail and MSME loans account for almost 60 per cent of banks’ overall loans.
He said: “There’s a limit to which banks can keep lowering the interest rates….Yield of the 10-year benchmark Government security is fairly intransigent in the 6.65-6.70 per cent range. And the fact that banks are now no longer able to pass on repo rate cuts as they’re losing deposits itself shows that the transmission is over.”
Marginal cost up
The one-year median marginal cost of funds-based lending rate (MCLR) of SCBs increased to 8.45 per cent in February 2026 (back to the December 2025 level) from 8.40 per cent in January 2026, per RBI data on lending and deposit rates.
The weighted average domestic term deposit rate on fresh rupee term deposits of SCBs just about nudged down to 5.66 per cent in January 2026 (5.67 per cent in December 2025).
V Rama Chandra Reddy, Head – Treasury, Karur Vysya Bank, said: “I think, the lending rates have bottomed out….banks are either increasing spreads on fresh floating rate loans or giving more fixed rate loans.”
Sabnavis said that banks’ are raising short-term bulk deposits to offset the relatively slower growth in retail deposits (as compared to loan growth). And this explains why the deposit rates are sticky.
Published on March 5, 2026
