Banks raise lending rates faster when RBI hikes repo rate:Home loan interests reduce at slower speed on repo cut — why?

Banks in India change loan interest rates faster when the Reserve Bank of India (RBI) raises the repo rate than when it cuts rates. RBI data shows repo-linked loans adjust within three months, while older benchmark loans take six to twelve months. The Reserve Bank of India (RBI), governor, Sanjay Malhotra, said on Wednesday, 7 October, 2026, that the Monetary Policy Committee (MPC) has decided to increase repo rate by 25 basis points (bps) to 5.50%. How Quickly Banks Pass On Repo Rate Changes? The RBI uses the policy repo rate to control inflation and support economic growth. When the RBI changes this rate, banks adjust their lending rates. However, official RBI reports show that banks do not increase and decrease loan rates at the same speed. When the RBI increases the repo rate, banks pass on the cost to borrowers quickly. When the RBI cuts the repo rate, loan rate reductions take longer for existing borrowers. PTI said that speaking to reporters, RBI Deputy Governor Swaminathan J said it typically takes around two quarters for the hikes to get transmitted to actual lending rates for end borrowings. Reasons for the Delay in Rate Cuts According to RBI studies, structural factors inside the banking system cause this difference in speed: Fixed Deposit Costs: Banks fund loans through term deposits. When RBI cuts rates, existing term deposits remain locked at higher fixed interest rates. Margin Protection: Banks raise lending rates fast during rate hikes to maintain their Net Interest Margins (NIMs). Net Interest Margins (NIMs) mean the difference between interest rates of CASA and loans. Higher the NIM, the healthier it is for the bank. Are banks likely to wait for festive season to get over before hiking loan RoI? Abhishek Raj, promoter, real estate developer, Jenika Ventures, says in the past, it has been noted that the bank need not wait for the festival season to end in order to raise the repo rate. RBI hiked policy rates by 25bp and adopted a cautious tone, while the change in stance to another new nomenclature “calibrated tightening” felt more like a forward guidance than a policy stance per se, but has prepared markets for a higher-for-longer interest rate environment. -Madhavi, Emkay RBI’s decision to impact real estate market? Raj adds that as far as the residential property market is concerned, the increased borrowing cost will affect the buying ability and decision, particularly at the mid-income level. Albeit, Raj doesn’t hesitate to add that in short, while rate hikes do generate caution, “the fundamentals of the real estate sector in India are robust and growth oriented.” Ashok Nehlia, Founder CEO, Nehlia Developers, says that in the residential segment, while interest rates are definitely one of the key factors, these are not the only factors that determine the buying sentiment. He adds that the current generation of homebuyers is more concerned about the value, quality of development, lifestyle and the land-related products. We firmly believe that projects having good fundamentals, location, and unique offerings will continue to receive demand despite any short-term changes in interest rates. -Ashok Nehlia, Founder CEO, Nehlia Developers While other realtors industry bodies CREDAI and NAREDCO said on Wednesday to PTI that housing sales could be impacted during the upcoming festive season following the RBI’s decision to hike repo rate by 25 basis points. Interest rates on home loans would increase after the RBI’s latest move, they added.
CREDAI national president Shekhar Patel and NAREDCO president Praveen Jain said the RBI’s decision would lead to a rise in interest rate on home loans, which in turn, could have some impact on housing sales. We are also entering the festive season, which is an important period for the housing market, and the increase in borrowing costs could have some impact on sales during this period, although the underlying demand for housing remains strong. -CREDAI national president Shekhar Patel Banks will begin passing on repo-rate hike without waiting for festive season to end While, Lovelesh Sharma, Sebi Registered RA, says that he expects banks to begin passing on the repo-rate hike without waiting for the festive season to end, although the timing will depend on each loan’s benchmark and reset schedule. The Repo-linked floating-rate loans will adjust at their contractual reset dates, while MCLR-linked loans may respond more gradually. Banks may cushion festive demand through processing-fee waivers and selective offers, but a broad postponement of lending-rate increases appears unlikely. -Lovelesh Sharma, Sebi Registered RA