Indian banks are taking a measured approach to raising lending rates after the Reserve Bank of India (RBI) increased the repo rate by 25 basis points to 5.50% in October 2026. While several public sector lenders have already revised their repo-linked lending rates, private sector banks have not broadly passed on the increase to borrowers yet.
The delay reflects differences in loan benchmarks, funding costs and liquidity conditions. Banks are balancing the need to protect their lending margins against the risk of making loans more expensive. For borrowers, the impact will depend largely on whether their loans are linked to the repo rate, the marginal cost of funds-based lending rate (MCLR), or another benchmark.
Banks Delay Broad-Based Lending Rate Increases
The RBI raised the policy repo rate by 25 basis points on October 7, 2026, taking it to 5.50%. The decision marked a shift towards tighter monetary policy amid rising inflationary pressures.
Although some banks revised their lending rates soon after the announcement, the increase has not been passed on uniformly across the banking industry.
According to bankers quoted by Moneycontrol, lenders are adopting a calibrated approach and deciding when to adjust rates across different loan categories.
Bank of Baroda, Indian Bank and Indian Overseas Bank have increased selected lending rates, while private sector lenders have yet to implement a broad-based increase.
| Bank | Earlier lending rate | Revised lending rate | Increase |
|---|---|---|---|
| Bank of Baroda | 7.90% | 8.15% | 25 bps |
| Bank of India | 8.10% | 8.35% | 25 bps |
| Indian Bank | 7.95% | 8.20% | 25 bps |
| Indian Overseas Bank | 8.10% | 8.35% | 25 bps |
These are reported repo-linked benchmark rates, not the final interest rates offered to every borrower. Individual loan rates may include additional spreads and depend on the applicable terms.
The changes demonstrate that the RBI’s policy decision has already affected some borrowers, particularly those with loans linked to external benchmarks.
However, banks are not necessarily changing every lending benchmark at the same time.
Why Private Banks Are Not Immediately Raising Loan Rates
One reason for the gradual transmission is the difference between the cost of funds and the interest earned on loans.
Banks must consider how much they pay depositors before deciding whether to increase lending rates. If funding costs remain relatively stable, lenders may have less immediate pressure to raise borrowing rates.
The availability of liquidity is another important factor.
Banks received substantial foreign currency non-resident bank (FCNR(B)) deposit inflows, which provided additional funding flexibility. This reduced the immediate need for some lenders to compete aggressively for domestic deposits.
Consequently, banks can allow lending and deposit rates to adjust at different speeds.
A senior banking official quoted by Moneycontrol said lenders were timing the transmission across repo-linked and MCLR-linked loans rather than implementing a uniform increase immediately.
The pace of adjustment also varies between banks. Some lenders revise their rates in the same month, while others make changes towards the end of a quarter.
Repo-Linked Loans Will Feel the Impact Faster
The benchmark attached to a loan is one of the most important factors determining how quickly an RBI rate change affects borrowers.
External Benchmark Lending Rate (EBLR)-linked loans are directly connected to an external benchmark, commonly the RBI repo rate. When the benchmark changes, the lending rate generally adjusts according to the loan’s reset terms.
According to RBI data, EBLR-linked loans accounted for 68.2% of scheduled commercial banks’ outstanding floating-rate rupee loans.
This means a large proportion of floating-rate borrowers could eventually feel the impact of the October rate increase.
MCLR-linked loans work differently. The MCLR is influenced by a bank’s marginal cost of funds, operating expenses, tenor premium and other factors. Changes in deposit costs therefore play an important role in determining when MCLR moves.
As a result, MCLR-linked borrowers may experience the impact with a delay.
| Loan benchmark | How it works | Effect of RBI repo rate increase |
|---|---|---|
| EBLR | Linked to an external benchmark, often the repo rate | Usually faster transmission |
| MCLR | Based on the bank’s marginal cost of funds and other components | Gradual transmission as funding costs change |
| Base Rate | An older internal benchmark used for eligible legacy loans | Depends on the bank’s revision process |
The RBI’s data also showed that MCLR-linked loans accounted for 29.6% of outstanding floating-rate rupee loans.
The figures indicate why the same RBI decision can affect borrowers at different times.
Will Home Loan and Personal Loan EMIs Increase?
Borrowers with floating-rate loans linked to the repo rate could face higher interest costs when their banks revise the applicable rates.
For example, a borrower with a repo-linked home loan may see the interest rate increase when the lender resets the loan benchmark. Depending on the bank’s policy and the loan agreement, the higher rate could increase the EMI or extend the repayment period.
However, the adjustment is not necessarily automatic in the form of a longer tenure.
Bankers told Moneycontrol that lenders are not extending loan tenures automatically to cushion customers from higher interest rates. Borrowers who want a longer repayment period must generally submit a specific request to their bank.
Bank of Baroda Managing Director and CEO Debadatta Chand said that any extension of loan tenure depends on the customer’s request. He also explained that MCLR-linked loans respond with a lag because changes in MCLR depend on deposit repricing and the bank’s cost of funds.
Borrowers should therefore check three things:
- Whether their loan is linked to EBLR, MCLR or another benchmark.
- When the next interest-rate reset is scheduled.
- Whether the bank will adjust the EMI, repayment tenure or both.
Existing fixed-rate loans are generally not affected by a change in the repo rate during the fixed-rate period, subject to the terms of the loan agreement.
Banks May Increase Deposit Rates as Liquidity Tightens
Although banks are not rushing to increase lending rates, competition for deposits is becoming more important.
Bank credit grew 17.9% year-on-year to ₹232.54 lakh crore as of October 15, 2026. Deposits increased 16.6% to ₹284.37 lakh crore during the same period, according to the RBI’s latest fortnightly data cited by Moneycontrol.
The faster growth in credit compared with deposits makes deposit mobilisation an important priority for lenders.
Some banks, including ICICI Bank and Indian Bank, have already increased rates on selected fixed deposit products. However, there has not yet been a broad-based increase across the industry.
Bankers indicated that if tighter liquidity conditions persist, more lenders could consider raising retail term deposit rates.
The timing will depend on how quickly the banking system’s liquidity changes and whether banks need to attract additional domestic savings to support lending.
Higher deposit rates would eventually increase banks’ funding costs and could create further pressure to adjust lending rates.
What the RBI Rate Hike Means for Banks
The gradual transmission of higher lending rates could initially support banks’ net interest margins (NIMs).
NIM measures the difference between the interest income a bank earns on loans and investments and the interest it pays on deposits and other funding.
If lending rates rise faster than deposit rates, banks may temporarily earn a wider spread.
However, the benefit may differ across lenders depending on their share of repo-linked loans, deposit composition and liquidity position.
A report by Business Standard noted that analysts expect banks with a larger proportion of external benchmark-linked loans to experience faster asset repricing. Deposit costs, particularly on existing deposits, may adjust more slowly.
The situation could change if banks face stronger competition for deposits or if liquidity conditions tighten further.
The Bigger Picture
The RBI’s rate increase shows how monetary policy moves through the banking system at different speeds. Repo-linked loans respond more directly to changes in the policy rate, while MCLR-linked loans depend more heavily on banks’ funding costs. This explains why some borrowers may see higher interest costs before others.
For banks, the challenge is to balance loan pricing, deposit mobilisation and profitability. For households and businesses, the impact will depend on loan benchmarks, reset dates and individual bank decisions. The coming months will reveal how much of the policy rate increase is ultimately passed on to borrowers.
Looking Ahead
Banks are likely to continue monitoring liquidity, deposit growth and credit demand before making further changes to lending and deposit rates. If funding conditions become tighter, more lenders may increase deposit rates, potentially creating additional pressure on lending rates. The pace of transmission will vary across institutions rather than occurring uniformly.
Borrowers should review their loan agreements and check with their lenders about benchmark changes and upcoming reset dates. The RBI’s 25-basis-point increase does not mean every loan EMI will rise immediately, but customers with floating-rate loans should prepare for possible adjustments as banks complete the transmission process.
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