Whalesbook
### Lending Costs Ease Following RBI Easing
The Indian banking sector experienced a significant reduction in borrowing costs in December 2025, with the average lending rate on fresh rupee loans falling by 43 basis points from the previous month to 8.28%. This shift is the first concrete indicator of the Reserve Bank of India's (RBI) December 2025 monetary policy action, which included a 25-basis point cut to the repo rate. This move was part of a broader easing cycle totaling 125 basis points throughout 2025. The weighted average lending rate (WALR) on outstanding rupee loans also saw a decrease, settling at 9.06% in December, down from 9.21% in November. Similarly, the median Marginal Cost of Funds based Lending Rate (MCLR) for one-year tenor moderated to 8.40% in January 2026.
### Public Sector Banks Drive Rate Transmission
Public sector banks were notably more aggressive in passing on the benefits of lower policy rates. Interest rates on new rupee loans from state-run banks plummeted by over 100 basis points, reaching an average of 7.61%. In contrast, private sector banks implemented more modest reductions, cutting their lending rates by 30 basis points to 9.14%. This divergence highlights varying speeds of monetary policy transmission across different banking segments. Despite the decline in lending rates, the weighted average domestic term deposit rate (WADTDR) on fresh rupee deposits edged up to 5.67% in December 2025 from 5.59% in November, as both state-run and private banks increased deposit offerings. This rise in deposit costs, while lending rates fall, could place pressure on banks' Net Interest Margins (NIMs).
### Economic Context and Future Outlook
The RBI's decision to lower the repo rate was underpinned by a favorable inflation outlook, with the central bank forecasting inflation at 2.0% for FY26 and maintaining a neutral policy stance. This accommodative monetary stance aims to support economic growth, which the RBI projected at 7.3% for FY26. Rate cuts generally stimulate economic activity by making borrowing cheaper, potentially boosting housing demand, auto sales, and corporate investment. While the December rate cut signals an intent to foster credit flow, analysts suggest that the current rate-cut cycle may have concluded, with future policy likely dependent on inflation trajectory and global economic conditions. Deposit growth has also eased, with early January 2026 data showing a 10.6% year-on-year increase, compared to credit growth of 13.1%.