The Reserve Bank of India (RBI) has recently introduced a series of measures aimed at expediting the transmission of interest rates, intending to benefit both borrowers and the overall economy. These regulatory amendments, announced on Monday, September 29, 2025, address various aspects of lending and credit management, with some taking immediate effect on October 1, 2025, while others are open for public feedback as draft proposals.
Easing of Spread Component Lock-in
One of the key changes involves allowing banks to reduce the spread components on floating rate loans even before the current three-year lock-in period expires. This revision to the directions on interest rate on advances is expected to lead to quicker transmission of rate cuts, potentially resulting in lower Equated Monthly Installments (EMIs) or reduced interest payouts for borrowers.
Understanding Monetary Policy Transmission
Monetary policy transmission refers to the process by which changes in the RBI's policy rate (repo rate) influence interest rates across the economy. The repo rate is the interest rate at which the RBI lends money to commercial banks. When the RBI adjusts the repo rate, it sets off a chain reaction that affects borrowing costs for financial institutions, deposit rates, and ultimately, lending rates for consumers and businesses. Effective monetary policy transmission is crucial for the RBI to achieve its objectives of price stability and economic growth.
Challenges in Transmission
Despite the RBI's efforts, the transmission of policy rate changes has often been incomplete. Several factors can impede this process, including:
- Banks' cautious behavior: Banks may be hesitant toLower lending rates rapidly due to pressures to protect deposits and concerns about investment appetite.
- Incomplete transmission to NBFCs: Non-Banking Financial Companies (NBFCs) often face higher borrowing costs and may cater to riskier borrower segments, which can dampen the adjustment of their lending rates.
- Rigidity in banks' interest rates: Rigidity in interest rates on banks' saving deposits can also hinder effective policy rate transmission.
RBI's Broader Strategy
The recent measures are part of a broader strategy by the RBI to ensure that the benefits of policy rate cuts reach the end consumer more efficiently. In addition to these measures, the RBI has also been actively managing liquidity in the banking system to support loan growth and avoid spikes in funding costs. For instance, since January 2025, the RBI has injected significant liquidity through government securities purchases and has also cut the cash reserve ratio (CRR), giving banks more flexibility to reduce lending rates.
Impact and Expectations
These new norms are expected to have a positive impact on borrowers, as banks will have more flexibility to adjust interest rates on floating rate loans. By allowing banks to reduce spread components before the lock-in period, the RBI aims to create a more responsive lending environment, where rate cuts are passed on to borrowers more quickly.
The RBI's move comes at a time when there is already an expectation that the Monetary Policy Committee (MPC) may hold interest rates steady. The transmission of past rate cuts has been assessed as nearly complete for fresh deposits, but muted for outstanding deposits. Similarly, the weighted average lending rate for fresh loans has declined more than that of outstanding loans.
Other Amendments
In addition to the changes in interest rate transmission, the RBI has also announced other regulatory amendments, including easing gold loan norms and relaxing norms for large credit exposures. These measures are aimed at providing greater flexibility to banks and promoting financial stability.
