The RBI's Steady Hand
On August 5, 2026, the RBI's Monetary Policy Committee (MPC) unanimously decided to keep the benchmark repo rate unchanged at 5.25% for the fourth consecutive meeting. The move was widely expected, as the central bank continues to navigate a complex global
environment marked by geopolitical tensions while managing domestic inflation. Governor Sanjay Malhotra highlighted that while the growth outlook remains resilient, with the FY27 GDP forecast revised up to 6.7%, the RBI needs greater clarity on the inflation path before taking further action. This creates a picture of policy stability, where the key lending rate that influences the entire system remains constant.
Beyond the Repo Rate: Understanding Spreads
It's easy to assume that a stable repo rate means stable loan EMIs. While the two are linked, they aren't the same thing. The repo rate is the interest rate at which the RBI lends to commercial banks. A bank's lending rate, however, is determined by its own cost of funds plus a 'spread'. This spread is a margin that covers operating expenses, a premium for the risk of the loan not being repaid, and the bank's profit. Therefore, even if the repo rate doesn't move, changes in a bank's funding costs or its perception of risk can cause lending rates—and EMIs—to change.
The Real Driver: Rising Cost of Funds
Here lies the core of the case for wider spreads: bank funding costs are on the rise. In recent months, competition for deposits has intensified. Data from June showed that the average domestic term deposit rate for commercial banks climbed as lenders scrambled to attract funds. Private banks, in particular, have been aggressive in raising their deposit rates. This is happening because credit growth is outpacing deposit growth, forcing banks to rely more on wholesale borrowing, which is more expensive. This pressure on funding costs means that to protect their Net Interest Margins (NIMs)—a key profitability metric—banks have a strong incentive to increase the rates they charge on loans, irrespective of the RBI's actions.
Strong Credit Demand Creates Pricing Power
The other side of the equation is demand. Despite global headwinds, credit demand in India remains robust, with bank lending growing at a healthy pace. This strong demand, particularly from the retail and MSME sectors, gives banks significant pricing power. When many people and businesses are seeking loans, banks can pass on their higher funding costs to borrowers without a significant drop in business. This dynamic allows them to widen their lending spreads—the gap between their cost of funds and their lending rates—to preserve or even enhance their profitability. The stability provided by the RBI's rate pause gives banks the confidence to plan their lending strategies in this environment.
What This Means for Borrowers and Banks
For prospective borrowers, this environment means that waiting for an RBI rate cut might not bring the expected relief. Loan rates could become more expensive even if the repo rate stays put, driven by the internal cost structures of the banks themselves. For existing borrowers with floating rate loans, while there's no immediate change from the RBI's decision, any future repricing by their bank could reflect these higher underlying costs. For banks and their investors, the ability to recalibrate lending rates in response to funding costs is positive. It suggests that Net Interest Margins, which have been under some pressure, may stabilise or improve, supporting the sector's financial health.
