Why many floating-rate borrowers are yet to see lower EMIs despite RBI rate cuts

The Reserve Bank of India's cumulative 125-basis-point reduction in the repo rate since February 2025 has lowered borrowing costs across the financial system, but the transmission to floating-rate borrowers remains uneven, varying across banks, non-banking financial companies (NBFCs) and loan products.

The RBI's external benchmark lending rate (EBLR) framework requires banks to link new floating-rate retail and MSME loans to an external benchmark such as the repo rate. As a result, borrowers with repo-linked home, vehicle and MSME loans have generally seen faster transmission of policy rate cuts than those with loans linked to the marginal cost of funds-based lending rate (MCLR) or older benchmarks.

However, the benefit is not always immediate. Even for external benchmark-linked loans, interest rates are revised only on the contractual reset date, which is typically quarterly. Consequently, many borrowers may not see an instant reduction in their equated monthly instalments (EMIs) after every RBI policy action.

The impact on monthly repayments also depends on the lender's loan servicing policy. In many cases, banks choose to keep the EMI unchanged and instead reduce the loan tenure when interest rates decline, while some borrowers may opt for a lower EMI with the original tenure remaining unchanged.

Transmission faster at banks

Transmission has been relatively faster among banks than NBFCs. Unlike banks, NBFCs are not required to price floating-rate loans against an external benchmark and generally determine lending rates based on their cost of funds, funding mix and internal pricing models. As a result, the pass-through of policy rate changes can vary significantly across NBFCs.
The divergence is particularly evident in the home loan segment. Borrowers with repo-linked loans have generally benefited from successive policy rate cuts, while those with older MCLR- or base rate-linked loans may have experienced slower transmission because interest rates are revised only on their scheduled reset dates. Some borrowers have also chosen to switch to external benchmark-linked loans to benefit from faster transmission where commercially viable.

For MSMEs, the RBI's benchmark-linked lending framework has strengthened monetary policy transmission through banks. However, a sizeable section of small businesses continues to borrow from NBFCs because of quicker loan approvals, greater underwriting flexibility and customised financing solutions, resulting in a less uniform pass-through of policy easing.

The picture is more varied for large corporates. Corporate loans are priced using a combination of external benchmarks, MCLR, treasury benchmarks, negotiated spreads and market-linked rates, depending on the nature of the facility and the borrower's credit profile. Consequently, the impact of repo rate changes differs across borrowers and financing instruments.
Analysts expect the transmission of monetary policy to improve further as more floating-rate loans reach their scheduled reset dates and banks continue to reprice their loan books. However, the pace is likely to remain uneven, reflecting differences in loan benchmarks, funding costs and lending strategies rather than the policy rate alone.