Foreign banks in India reduced lending and deposit rates more aggressively than public and private sector peers between February 2025 and May 2026. Data from the RBI shows foreign lenders passed on a larger portion of the central bank's 125 basis point repo rate cut, impacting loan affordability and deposit yields for customers.
Detailed Coverage
Foreign banks operating in India have outperformed their public and private sector counterparts in adjusting interest rates following the Reserve Bank of India’s (RBI) recent policy easing cycle. According to the RBI’s July 2026 Bulletin, between February 2025 and May 2026, the central bank reduced the repo rate by 125 basis points. During this period, foreign lenders implemented faster and deeper rate adjustments for both borrowers and depositors.
Lending Rate Reductions by Bank Category
For customers seeking new rupee loans, foreign banks recorded a reduction in the weighted average lending rate (WALR) of 108 basis points. In comparison, private sector banks lowered their rates by 81 basis points, while public sector banks—often constrained by their large legacy deposit bases and existing loan portfolios—reduced rates by 66 basis points. The gap in transmission remains significant, as foreign banks operate with a business model that is less dependent on large-scale retail branch networks, allowing them more flexibility to align their rates with external benchmarks.
Impact on Deposits and Lending Benchmarks
Foreign banks also led in deposit rate adjustments. They decreased interest rates on fresh domestic term deposits by 91 basis points. Meanwhile, private and public sector banks reduced these rates by 74 and 73 basis points, respectively. For existing depositors, the difference was even more pronounced, with foreign banks passing on 90 basis points of the policy easing, significantly higher than the 46 to 53 basis point range seen at domestic lenders.
The RBI noted that the rapid transmission is largely due to the widespread adoption of external benchmark-linked lending rates (EBLRs). These loans automatically move in sync with the repo rate, leaving lenders with little choice but to pass on the changes immediately. This has created a more transparent interest rate environment, though it also means that when the policy rate eventually rises, these borrowers will also see their interest costs climb faster.
Sector-Specific Loan Trends
Investors tracking the banking sector should note that the transmission of rate cuts has not been uniform across all loan categories. Infrastructure-related loans saw the highest reduction in interest costs, falling by 123 basis points, as these are frequently tied to external benchmarks. Education and vehicle loans followed closely with a 118 basis point reduction. Conversely, sectors like agriculture and trade experienced more modest rate decreases, likely due to a higher concentration of older loan contracts that are not linked to current external benchmarks. The key monitorable for the coming quarters will be how domestic banks manage their margins as they continue to transition more of their legacy loan books to these transparent, benchmark-linked structures.