The transmission of policy rate on the term deposit side has been greater than on the credit side in the current interest rate tightening cycle.
According to Reserve Bank of India (RBI) data, consequent to the 250 basis points (bps) policy rate hike by the rate-setting body—the monetary policy committee (MPC)—since May 2022, the weighted average domestic term deposit rates (WATDRs) on fresh and outstanding deposits increased by 243 bps and 188 bps, respectively. In contrast, weighted average lending rates (WALRs) on fresh and outstanding rupee loans increased by 181 bps and 119 bps, respectively, during May 2022 to June 2024. Additionally, the one-year median marginal cost of funds-based rate (MCLR) of banks increased by 170 bps during May 2022 to July 2024.
Among different bank groups, state-owned banks have seen a greater increase in interest rates on term deposits—both new and existing—compared to their private sector peers. Conversely, on the lending side, the increase in rates for new and outstanding rupee loans has been smaller for state-owned banks than for private banks.
Meanwhile, during the easing cycle as well, the transmission of the policy rate was more pronounced on the deposit side compared to the lending side. Consequent to a 250 bps cut by the MPC, the WATDRs on fresh and outstanding deposits declined by 259 bps and 188 bps, respectively, while on the lending side, the WALR on fresh and outstanding loans declined by 232 bps and 150 bps, respectively.
According to Madan Sabnavis, Chief Economist, Bank of Baroda, deposit rates are directly under the control of banks, so the revision in the rates consequent to the revision in policy rates happens almost entirely based on their changes for different tenures. This was more effective in the period when RBI raised rates.
However, on the lending side, banks have an external benchmark linked rate (EBLR) and MCLR.
“While the revision in EBLR happens instantly, depending on the benchmark they are linked to, the revision in MCLR depends on the cost of funds of the banks, which in turn depends on a lot of other parameters, so the MCLR does not move in tandem with the policy rate,” Sabnavis said, adding that the recent deposit mobilization trend, whereby banks are increasing short-term deposit rates to garner more deposits, will increase the average cost for fresh deposits by a marginal amount as this is on certain tenures only. Therefore, one will never observe a commensurate increase in this cost.
First Published: Aug 21 2024 | 7:39 PM IST
