Day after MPC: Banks kick off lending, deposit rate hikes

Several banks, including Bandhan Bank, Kotak Mahindra Bank, Jana Small Finance Bank, Bank of Baroda and ICICI Bank also announced deposit rate hikes across multiple tenor baskets for retail customers. Kotak Mahindra raised interest rates on 390 days fixed deposit by 30 basis points to 5.5 per cent and 23 months FD rates by 35 bps to 5.6 per cent.

Banks. which are offering repo-linked lending rate, will have to hike the interest rates by 40 basis points. As per an October 2019 circular from RBI, banks linked their retail loans to external benchmark lending rates (EBLR). As a result, most banks have adopted the repo rate as their benchmark. As banks borrow money from the RBI at the repo rate, any change in the repo rate affects the lending rate of banks. MCLR-linked loans had the largest share (53.1 per cent) of the loan portfolio of banks as of December 2021. The share of EBLR loans in total advances was 39.2 per cent in December 2021, according to the RBI.

The RBI on Wednesday jacked up the repo rate, the main policy rate, by 40 basis points to 4.4 per cent and the cash reserve ratio (CRR) by 50 basis points to 4.5 per cent to bring down the elevated inflation and tackle the impact of geopolitical tensions.

In an unscheduled meeting of the Monetary Policy Committee, the central bank, however, retained the accommodative monetary policy. The sudden RBI move — the first hike after August 2018 — is expected to push up interest rates in the banking system. Equated monthly instalments (EMIs) on home, vehicle and other personal and corporate loans are likely to go up. Deposit rates, mainly fixed term rates, are also set to rise.

SBI, Bank of Baroda, Kotak Mahindra Bank and Axis Bank had hiked the marginal cost of fund-based lending rate (MCLR) last month. SBI raised its MCLR by 10 basis points or 0.1 percentage point across all tenures, while the other three have raised it by 5 bps, or 0.05 per cent across the board.

The rate hike has come at a time when the banking system credit growth offtake has shown a significant pick-up in the early part of FY23 with 11.2 per cent rise as on April 8, 2022, compared to 5.3 per cent in the same period in April 2021, and highest since July 2019.