Key Details
The RBI October 2026 Bulletin article Transmission to Lending Rates of Scheduled Commercial Banks (SCBs): Price versus Composition Effects in WALR separates two reasons an average lending rate can move: banks changing loan rates and banks making different kinds of loans. Its principal decomposition gives the following results for fresh rupee loans.
Period | Repo-Rate Change | Change in Average Fresh-Loan Rate | Rate Effect | Loan-Mix Effect |
|---|---|---|---|---|
May 2022–January 2025 tightening | +250 basis points | +181 basis points | +191 basis points | −10 basis points |
February 2025–March 2026 easing | −125 basis points | −93 basis points | −80 basis points | −13 basis points |
A basis point is one-hundredth of a percentage point. The article also tests alternative ways of separating the effects; the precise split can vary with the method.
A Falling Average Rate Does Not Mean Every Loan Became Cheaper
The weighted average lending rate (WALR) reflects both the interest rates banks charge and the amounts lent at each rate. It can therefore fall because banks reduce rates on comparable loans — or because a larger share of new lending goes to lower-rate borrowers, sectors or banks.
During the easing period studied, the average rate on fresh loans fell 93 basis points. The researchers attribute most of that decline — 80 basis points — to changes in lending rates. The remaining 13 basis points came from changes in where new credit flowed. Loan-mix effects also partly offset the rise in the average rate during the earlier tightening period.
Loan-Mix Changes Can Obscure Policy Transmission
Earlier RBI assessments have tracked how changes in the policy repo rate reach bank lending rates. This article adds a more precise reading of that transmission: a change in the average fresh-loan rate is not, by itself, a measure of how much banks repriced loans.
That distinction is particularly useful for fresh lending, whose composition can change quickly. The researchers examine rates and loan amounts across banks and sectors, then test their results using several decomposition methods. The broad finding holds: both repricing and credit allocation shape the reported average. The analysis ends in March 2026; it does not assess transmission of the RBI’s October 2026 rate increase.
Policy Relevance
The finding changes how policymakers should read a familiar indicator, not how banks are required to price loans. Tracking rate and loan-mix effects separately would make it easier to see whether a policy change is reaching borrowers through repricing, or whether the aggregate number is being moved partly by shifts in credit. Sector-level results could also show where borrowing conditions differ from the system-wide average.
Follow the Full Article Here: Transmission to Lending Rates of SCBs: Price versus Composition Effects in WALR