Transmission of policy rate changes in still being seen in lending and deposit rates and banks are expected to hike deposit rates further given the sustained gap in credit and deposit growth and the impact high cost deposit mobilisation on banks’ margins.

“If you look at transmission over a period of time, say April to February 2024, it is still going on. In fact, in January 2024, there was 13 bps increase in fresh loans rates, so we are still seeing a little bit of transmission going through. We feel as the mobilising of deposits takes place at higher and higher rates, there will be further transmission to lending rates,” Deputy Governor Michael Patra said in the policy conference.

“We see a structural deficit between credit and deposits and that is why we are seeing a flurry of efforts to raise bulk deposits. There is still a need for deposits, and these deposits come at a higher rate than retail deposits. So one day, banks will try to protect the NIMs and they will pass on a little bit more,” he said.

RBI has increased the repo rate by 250 bps since May 2022. In comparison, the weighted average rate on outstanding loans has risen by 109 bps to 9.81 per cent as of February 2024 and on fresh loans by 185 bps to 9.36 per cent. The weighted average rate of outstanding term deposits has increased 183 bps to 6.86 per cent and on fresh term deposits by 241 bps to 6.44 per cent as of February 2024.

Deputy Governor Swaminathan J said that banks are quite active in terms of mobilising deposits given the 3-3.5 per cent credit-deposit gap visible for more than a year now. Customers are also becoming price sensitive and there’s a significant movement towards term deposits whereas the proportion of CASA deposits is declining.

With respect to transmission in lending rates, he said that the impact also needs to be seen in the context of different loan categories given that currently only 50-53 per cent loans are linked to an external Benchmark where the transmission can be near-real time. The remaining 47 per cent loans are linked to various other benchmarks where transmission happens over a period of time.

“There is a competition for good quality business so obviously the banks will take a business call in terms of what sort of spread they would like to maintain, and if there is some sacrifice in spread it may impact the effective interest rate,” he said.