Banks are expected to gradually up their lending and deposit rates following the 40 bps hike in policy repo rate.
Rajkiran Rai G, MD & CEO of Union Bank of India, observed that overall, the long-term indications are very clear — interest rates on deposits and advances will go up gradually. He underscored that the banking system still has sufficient liquidity and credit demand has not picked up yet.
Expected, yet surprising
“This (rate hike) was expected, but the timing is a bit surprising. We have lot of repo rate (external benchmark rate)-linked loans. So, all those loans will be repriced now. The deposit cost for a bank goes up when the liquidity in the system goes down. Now, with the liquidity going out of the system, banks will start increasing deposit rates,” Rai said.
The proportion of floating rate loans linked to the external benchmarks rose further to 39.2 per cent in December 2021 from 28.6 per cent in March 2021 and 9.3 per cent in March 2020, which would strengthen transmission of changes in policy repo rate, RBI said in its latest monetary policy report.
Correspondingly, the share of MCLR (marginal cost of funds based lending rate)-linked loans has come down, although these still have the largest share (53.1 per cent in December 2021).
More hikes ahead?
RBI Governor Shaktikanta Das on Wednesday also announced a hike in the cash reserve ratio (CRR) by 50 bps to 4.5 per cent of banks’ deposits, effective from the fortnight beginning May 21. The withdrawal of liquidity through this would be of the order of ₹87,000 crore.
Madan Sabnavis, Chief Economist, Bank of Baroda, said: “We had expected 50 bps increase in repo rate in CY2022 but would now believe that there would be a further hike of 50 bps in the year. These twin measures (repo rate and cash reserve ratio hike) hence affect both the quantum of surplus liquidity in the system as well as the cost of funds.”