Banks have increased their spreads for repo-linked external benchmark loans, dampening the extent of transmission of the cumulative 125 bps repo rate cut into such loans.

This comes amid deposit rates turning sticky in the wake of higher interest rates being offered by small scale instruments (SSIs).

So, the increase in spreads (the mark-up charged over and above the policy repo rate) in the case of repo-linked external benchmark loans is aimed at protecting Banks’ net interest margins.

In the current easing cycle (up to February 2026), as against the 125 bps cut in the repo rate, the WALR (weighted average lending rate) on outstanding loans declined 87 basis points (bps). For fresh rupee loans, the WALR declined 89 bps, according to RBI’s latest monetary policy report (MPR).

The WADTDR (weighted average domestic term deposit rate) on outstanding deposits declined by 47 bps. For fresh deposits, the WADTDR declined by 97 bps.

The pass-through from policy rate changes to repo-linked external benchmark loans is one-to-one. But the same in the case of marginal cost of funds based lending rate (MCLR) linked loans and deposit rates happens with a lag.

Since February 2025, the RBI’s rate setting panel has cumulatively cut the repo rate (the interest rate at which the central bank provides liquidity to banks to overcome short-term mismatches) from 6.50 per cent to 5.25 per cent

Mark-up over repo rate rises

The spread on fresh rupee loans was the highest for education loans, followed by other personal loans, and MSME (micro, small and medium enterprise) loans for domestic banks, per the MPR.

The spread for MSME loans increased from 3.20 per cent in January 2025 to 3.29 per cent in February 2026.

For housing and vehicle loans, the spreads increased by 10 basis points each to 2.44 per cent (from 2.34 per cent in January 2025) and 3.17 per cent (3.07 per cent), respctively; for education loans and other personal loans the spreads increased by 21 bps (4.62 per cent) and 11 bps (to 3.47 per cent), respectively.

Sanjay Agarwal, Senior Director, CareEdge Ratings, said: “Due to sticky deposit rates and competitive pressures in high quality asset segments, banks have chosen to target relatively higher yield customers to protect their net interest margins (NIM). Hence, on book basis, the mark-up over external benchmarks has increased.”

However on y-o-y basis, overall spreads on fresh loans (lending rates minus deposit rates) have compressed by 13 bps, exhibiting challenges in re-pricing deposits to expected lower levels.

Agarwal opined that with significant increase in capital markets yields and overseas borrowings landed costs, the banks’ lending rates are expected to inch up in the near term, thereby halting the rate reduction process as on now.

Banking expert V Viswanathan observed that the effect of reduction in repo rate can be offset by Banks through revised spread for new loans to protect their profit margin in the wake of sticky deposit rates.

Published on April 14, 2026