After a gap of three months, banks have resumed raising interest rates on fresh loans. The rates increased by 14 basis points in October to 8.64% from 8.50% in September. Between July and September, banks had cut interest rates on new loans by 31 bps after hiking rates in July by 19 bps from 8.62% in June.
The hike in lending rates comes against the backdrop of the Reserve Bank of India (RBI) cutting the repo rate by 50 basis points in June to 5.5%. System credit in October grew 11.1% y-o-y compared with 10.2% in September.
With interest rates on new deposits falling by 4 bps in October to 5.57%, banks’ margins will be supported.
While private sector banks upped rates on fresh loans by 12 bps in October, public sector banks saw a 9 bps rise and the average lending rates of foreign banks jumped by 18 bps.
What do experts say?
Sanjay Agarwal, senior director at CareEdge Ratings observed that the simultaneous rise in rates on fresh loans and the decline in deposit rates are expected to provide banks with a much-needed cushion for net interest margins (NIMs). “The bulk of the repo-linked re-pricing isbehind them. This is a strategic shift and a deliberate effort by banks to improve profitability, with lending rates being raised across the system,” Agarwal said.
Nitin Aggarwal, research analyst at Motilal Oswal Financial Services wrote recently that the October uptick signals an active re-pricing of new loans at higher levels, aided by the completion of repo-linked resets and a gradual easing in the marginal cost of fund-based lending rates. He pointed out that with the one-year MCLR for private sector banks dipping 40–115 bps y-o-y, and public sector banks transmitting rates less aggressively by about 20–40 bps y-o-y, banks are now looking to stabilise yields by leveraging fresh loan repricing.
What do industry obervers suggest?
Industry watchers pointed out that in order to drive up yields, and protect their margins, banks are moving away from highly competitive corporate loans. Instead, they are focusing on relatively high-yield areas, including retail loans, unsecured personal loans, unsecured working capital for SMEs and adding exposure to non-banking financial companies (NBFCs).
Experts observe that with the rate reductions for savings accounts, already factored in, the benefit from term deposit re-pricing is progressing more gradually. “The impact is expected to become more visible in the second half of FY26, as re-pricing gathers pace and lowers overall funding costs,” a senior analyst said.
The weighted-average lending rates (WALR) on outstanding loans, however, continued their downward trend. Over the last 10 months, the WALR declined by 63 bps to 9.24% in October 2025, from 9.87% in January 2025. Seen on a month-on-month basis, the WALR on outstanding loans fell two bps. For private-sector banks, outstanding loan rates were flat at 10.17%, while public-sector banks saw a three bps decline to 8.60%.
On the deposit side, the outstanding weighted average term deposit rate (WATDR) also continued its downward trend. Overall, deposit rates fell four bps month-on-month in October to 6.78%, down 33 bps since March 2025.
