In his statement after the monetary policy meet, RBI governor Sanjay Malhotra said: “Transmission in the credit market, however, moderated during May-June with hardening of deposit and lending rates”.
It is important to note that in the last four monetary policy committee meetings, the Reserve Bank of India has kept the repo rate unchanged at 5.25%. However, transmission from last year’s cuts is still ongoing to this date, with a lag.
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In response to the 125 bps cut in the policy repo rate cumulatively, the weighted average lending rate (WALR) of Scheduled Commercial Banks declined by 80 bps for fresh rupee loans and 91 bps for outstanding rupee loans during February 2025 to June 2026.
So, in simpler terms, it means that the transmission rate is 64% for fresh loans and 72.8% for outstanding loans.
On the deposit side, the transmission has been far slower. The weighted average domestic term deposit rate (WADTDR) on fresh deposits has declined by 63 bps, while that on outstanding deposits has softened by 51 bps during the same period.
This would mean that the fresh deposits have seen transmission of just 50.4%, while old deposits have seen even lower transmission of 40.8%.
Lending rates are falling faster than deposit rates, squeezing banks’ profit margins. Three out of the top four private banks saw their net interest margin shrink in the first quarter of 2026. Relatively strong credit growth has helped offset the margin dent.
Where are interest rates headed from here?
Given the risk of rising inflation in the coming months, the benchmark interest rate is unlikely to go down. Add to that, the system liquidity, as measured by the net position under the LAF, stood at an average daily surplus of ₹1.0 lakh crore since the last MPC meeting in June 2026. Essentially, banks have more money than they can lend, and therefore, they are parking the surplus with the central bank.
In such a situation, deposit rates are unlikely to increase immediately. However, most experts believe interest rate hikes are inevitable; some starting in October and others in December, depending on the pace of inflation. “Repo rate is 100 basis points lower than where it should be,” said Kaushik Das, Chief Economist at Deutsche Bank.
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