Major banks raised benchmark lending rates but did not raise deposit rates in the same proportion

21 Nov 2022 , 07:43 AM

In unison with the rise in the Reserve Bank’s policy repo rate since May of this year, all major banks boosted their external benchmark-based lending rates (EBLRs) by 190 basis points. However, they were slower to raise deposit rates.

In order to control inflation, the Reserve Bank has increased the benchmark short-term lending rate (repo) by 190 basis points in four instalments since May.

Early in the next month, the RBI’s Monetary Policy Committee (MPC), which advises the central bank on interest rates, is scheduled to convene once more amid predictions of a further increase in the repo rate.

An RBI article states that by the end of October 2022, all banks will have raised their EBLRs by 190 bps to keep up with the rise in the policy repo rate since May 2022.

Additionally, from May to October 2022, banks raised their 1-year median marginal cost of funds-based lending rate (MCLR) by 85 basis points.

Beginning on October 1, 2019, all banks can only provide loans at interest rates correlated to external benchmarks, such as the Treasury Bill yield or the repo rate set by the RBI. As a result, banks are increasingly used to transmit monetary policy.

However, the banks only slightly increased the interest rates on term deposits.

From May to October 2022, there was a 48 bps increase in the median term deposit rates (average card rates on retail deposits) on new deposits. Bulk deposit rates at banks have climbed more than retail deposit rates.

According to the report, private sector banks (PVBs) have outperformed public sector banks (PSBs) across all bank categories in terms of transmission to lending and deposit rates.

The current era of interest rate tightening, which began in May of this year, has seen credit growth for PVBs that has been greater than for PSBs.

Private banks have raised lending and deposit rates in response to the rise in credit demand in order to sustain higher net interest margins (NIMs).

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