Transmission is normally reported as a single completeness figure: how much of a policy move turns up in bank rates. That averages two very different populations. One is the business a bank writes today, priced at current conditions. The other is the book it already carries, priced at whatever prevailed when each contract was signed.

Separate the two and a pattern emerges across both sides of the balance sheet and in both directions of the last full cycle.

Two Benchmarks
The Reserve Bank's own transmission table sets the last tightening cycle against the easing that followed.

Source: RBI Monetary Policy Report, 1 Finance Research. Percentages are computed against the repo movement in each cycle. The two windows are contiguous, so the legs can be netted. EBLR data covers 32 domestic banks.

Read across the EBLR row, and the policy rate arrives in full in both directions. Read across the MCLR row, and it arrives at 70% when rates rise and 24% when they fall, a nearly three-to-one difference.

That is not a rounding difference between technical measures. It is the difference between the two benchmarks under which Indian households actually hold floating-rate loans. The RBI itself acknowledges that internal benchmarks with longer reset periods slow transmission.

Consider two households with identical floating-rate home loans. One borrowed after October 2019 and is priced off the repo. The other borrowed earlier and remains on MCLR, as 29.6% of the floating-rate book still did in June 2026.

Through the tightening, the first absorbed 250 basis points and the second 175. Through the easing, the first received the full 125 and the second received 30. Because the measurement windows are contiguous, the round trip can be added up. The policy rate ended the cycle 125 basis points above where it started. The external-benchmark borrower ended 125 basis points higher, exactly tracking it. The MCLR borrower ended 145 basis points higher, further above their starting point than the policy rate itself.

Neither household chose this. The difference is the year each signed, and no instrument available to the MPC addresses it.

The split would matter less if it were evenly distributed. It is not. At end-June 2026, external benchmarks covered 90.8% of floating-rate loans at private banks and 94.7% at foreign banks, but only 53.6% at public sector banks. Put differently, 43.2% of public sector floating-rate loans remained on MCLR, against 8.7% at private lenders.

The household whose home loan sits with a public sector bank is therefore about five times as likely to be in the cohort that absorbs 70% of a hike and 24% of a cut. The household that borrowed from a private lender is far more likely to receive both in full, within a quarter of the decision.

The mechanism is contractual rather than behavioural. EBLR is tied to the repo with a mandatory reset at least quarterly, so an existing loan rate moves regardless of the borrower's actions. MCLR is an internal benchmark based on each bank's cost of funds, with reset periods typically annual. A policy change therefore reaches an MCLR borrower only when the reset clock allows it and only to the extent the bank's funding costs have moved.

That may be defensible for pricing an individual loan. It is harder to defend as a transmission mechanism when the two populations are this unequal, the split tracks bank ownership and the allocation is not decided by the committee setting the policy rate.

A Deeper Cycle

The obvious answer is that the problem will solve itself as more of the book migrates to external benchmarks.

It does, but too slowly to help borrowers facing the October decision. Public sector coverage rose from 47.2% in June 2025 to 53.6% in June 2026. At that pace, it would reach today's private-bank level around 2032.

The chart also captures something the aggregate hides. Public sector coverage stalled between mid-2022 and mid-2023, moving from 36.2% to 36.1%, while private banks rose from 64.5% to 73.2%. That stall coincided with the middle of the last tightening cycle, when the difference between the two benchmarks mattered most.

Two consequences follow. First, each cycle lands at full force on a larger share of the book: 44.1% of the floating book at the start of the last tightening cycle, versus 68.2% today. A given number of basis points is therefore a more restrictive instrument each time it is used, by an amount nobody votes on.

Second, migration runs on the loan side only. There is no external benchmark for a term deposit, no mandatory reset and no proposal to introduce one. That is why outstanding deposits captured 82% of the last tightening and gave back 42% of the easing, while the loan book was steadily converted into something that moves in full

What This Changes About the 2018 Comparison
This also changes the relevance of the 2018 comparison. The RBI raised rates by 25 basis points in June and again in August that year against a falling rupee and rising crude, then reversed the full 50 basis points within eight months. The warning is that a cycle begun under external pressure can need unwinding before it has done its work.

The warning is sound, but the transmission mechanism matters. That cycle was easier to reverse partly because almost none of it had reached an outstanding contract. External benchmarks did not exist. Floating loans sat on MCLR with typically annual resets, so for many existing borrowers, the hikes and cuts largely cancelled before either had fully arrived.

That escape route is now closed. A cycle that reaches two-thirds of the floating-rate loan book within one reset quarter, while leaving a third on slower internal benchmarks, cannot be unwound on 2018 terms. The up-leg and down-leg will land on different populations at different speeds, and the residue will not simply net to zero.

None of this is an argument against hiking. Retail inflation has been above target for three months, core inflation is at 4.3%, the wholesale-retail gap is more than five percentage points, and a rupee near 96 makes the case on its own.

It is an argument that the cycle now being discussed may be more powerful than its headline size suggests. The consensus expects 50 to 75 basis points, a range informed by what earlier cycles delivered. But earlier cycles delivered less restriction per basis point than this one will. The full-transmission share of the floating book has risen from 44.1% when the last tightening cycle began to 68.2% today. The committee that needed 50 basis points of restriction three years ago may need less today to achieve a similar effect.

There is a force pulling the other way. Banks still hold a liquidity surplus of ₹4.66 trillion after the September drain, and the call rate has been trading below the repo. A hike into that surplus restrains less than its headline size suggests, for as long as the surplus lasts. Two forces are therefore pulling in opposite directions: one makes each basis point heavier, the other lighter. The MPC has quantified neither.

The first it could quantify tomorrow. The RBI publishes the EBLR share every quarter and the transmission table twice a year, but has never set the two against each other. Doing so would show how restrictive a given repo rate has become relative to the same rate three years ago, a number the committee currently does not have.

Until it does, each MPC will continue sizing the cycle by analogy with a transmission regime that no longer operates. And the three in ten floating-rate borrowers still on an internal benchmark, most of them customers of state-owned banks, will continue receiving a different monetary policy from the one announced.