Transmission of higher interest rates on lending rates faster than on deposit rates

1 Nov 2022 , 09:25 AM

Since the Reserve Bank  started raising interest rates to keep inflation within the required target range of 2%—6%, transmission in lending rates has remained higher than that on deposit rates.

While the lending rates increased in September by 10-26 basis points (bps; one bps equals 0.01%). Only 9 basis points were added to deposit rates this month. Since May of this year, the Reserve Bank has been increasing its benchmark policy repo rate, which is the rate at which it loans to banks, since consumer price inflation has continued to rise over the desired range of 2 to 6%.

When the monetary policy committee met on September 30, it increased repo rates by 50 basis points to 5.9%, bringing the total rate increase since May to 190 bps.

According to the most recent central bank announcement, the weighted average lending rate (WALR) for new rupee loans from SCBs increased by 26 basis points (bps), from 8.33% in August 2022 to 8.59% in September 2022.

In August 2022, the WALR on SCBs’ outstanding rupee loans was 9.13%; in September 2022, it was 9.23%, an increase of 10 basis points. The median Marginal Cost of Fund based Lending Rate (MCLR) for one year went from 7.75% in September 2022 to 7.90% in October 2022, an increase of 15 basis points.

The compulsory external benchmark system for loan pricing in some industries, which was implemented in October 2019, has improved the monetary transmission channel through interest rates.

From 9.1% in March 2020 to 46.9% in June 2022, the share of outstanding floating-rate loans tied to external benchmarks has climbed. According to the RBI’s most recent monetary policy report, the percentage of loans that are tied to the marginal cost of funds-based lending rate (MCLR) has decreased to 46.5% as of June 2022.

On outstanding SCB rupee term deposits, the weighted average domestic term deposit rate (WADTDR) increased by 9 basis points from 5.29% in August 2022 to 5.38% in September 2022.

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