RBI rate cuts boost consumption: BoB and BoI lead in full transmission

The Reserve Bank of India (RBI) has cut the repo rate by 25 basis points on Friday, giving another push to stimulate consumption in the economy. BoB and BoI have immediately transmitted the cut in rates to their lending rates, thereby setting a model for the others to follow in the coming days.

BoI reduced the Repurchase-Based Lending Rate (RBLR) from a rate of 8.35% to 8.10%, while BoB reduced it from 8.15% to 7.90%, with immediate effect. RBI has now made four cuts to the rates in 2025, starting from 6.5% in February to 5.25% in December. The major issue is to ensure that it extends to the real economy, as underlined by the RBI governor, Sanjay Malhotra.

Full transmission is the difference.

Despite an August rate cut this year, no benefit flowed to borrowers in terms of lending costs because 10-year government bonds were elevated, leaving banks resistant to any attempts to cut down these lending costs. This time, RBI has introduced an additional Rs 1 trillion injection into the system via OMOs, thereby leaving the doors open to banks to lend more and creating a possible fresh wave of consumer demand.

The measure was taken against the backdrop of 50% tariffs composed by the US on Indian goods and the ongoing uncertainty in Indo-US trade discussions. Yet the economy stayed resilient, with Q2FY26 growth at 8.2%, a testament to the economy's power.

The SBI Chairman, C S Setty, has said:

"The rate cut will buttress the structural factors of sustained growth in the form of investment, credit, and consumption. Along with managing liquidity, these interventions promise to keep the economy moving and at the same time ensure price and financial stability."

Repo-Linked Loans First to Benefit

In the order of Repo Rate, Rate MCLR may work accordingly for the borrowers, with the rate cut being an effective tool for preemi-aid repo loan. Going further with the effect on a very large number of customers as individual households availed housing loans, car loans, educational loans, and personal loans, this may lead to create a potential urge for new investments and consumption that might further propel economic momentum.

The year 2025 witnessed fiscal stimuli to push up a share of consumption in India that accounts for almost 60% of GDP. As a reflection of such stimuli by the government, income-tax relief came up to an annual gross income of Rs 12.5 lakh; GST reforms reduced the outflow of indirect taxes on more than ninety-one percent of goods and services; and since its peak, the RBI has brought the Repo Rate down by a cumulative 125 basis points or more, bettering the environment for growth.