Foreign banks operating in India have passed on Reserve Bank of India (RBI) interest rate cuts to borrowers and depositors more quickly than public and private sector banks. Recent data shows international lenders reduced lending rates on new loans by 1.24 percentage points compared to 0.66 percentage points for public sector banks. This trend highlights differences in how various bank groups manage their margins and liquidity during policy easing cycles.
Detailed Coverage
Foreign banks in India have demonstrated a more aggressive approach to interest rate transmission during the current policy easing cycle, outpacing their domestic counterparts, according to the latest bulletin from the Reserve Bank of India. Transmission refers to the process by which a change in the central bank’s repo rate influences the interest rates banks charge on loans and pay on deposits.
Lending and Deposit Rate Adjustments
Between February 2025 and May 2026, foreign banks reduced their weighted average lending rates on new rupee loans by 1.24 percentage points. In comparison, private sector banks lowered rates by 1.08 percentage points, while public sector banks recorded a more modest reduction of 0.66 percentage points. This indicates that borrowers with loans linked to external benchmarks at foreign banks have likely experienced faster relief in their equated monthly installments (EMIs) compared to those at state-owned banks.
The trend was similar for deposit holders. Foreign banks reduced their weighted average domestic term deposit rates for fresh deposits by 0.91 percentage points. Private banks and public sector banks were slower to adjust, with reductions of 0.74 and 0.73 percentage points, respectively. For outstanding deposits, the gap was even wider, with foreign banks cutting rates by 0.90 percentage points, significantly higher than the cuts implemented by domestic banks.
Why Transmission Speeds Vary
Public sector banks often have a larger share of older, fixed-rate loans and a different deposit base structure, which can make them slower to adjust lending and deposit rates in response to repo rate changes. Foreign banks, which typically operate with a smaller, more corporate-focused loan portfolio, can often adjust their pricing more nimbly to maintain competitiveness and manage liquidity needs.
Since early 2025, the RBI has cumulatively reduced the repo rate by 1.25 percentage points to support the economy. While the central bank expects these rate cuts to eventually reach all sectors, the speed at which this happens depends heavily on each bank's cost of funds, the composition of their loan book, and their desire to protect profit margins. Investors looking at the banking sector may track these transmission speeds as they impact the net interest margin, which is the difference between the interest a bank earns from loans and pays out to depositors. As the cycle continues, the ability of public sector banks to improve their transmission speed while maintaining stable margins will be a key factor for market observers to track.