With deposit rates expected to remain stable over the near term, a swift rise in MCLR (marginal cost of funds based lending rate) is less likely, according to Kotak Securities.

The focus will shift to the rate of translation of decline in repo rates to lending yields, it added. The Reserve Bank of India (RBI) has cut the repo rate (the interest rate at which it provides liquidity to banks to overcome short-term mismatches) twice in the current calendar year -- February and April -- by 25 basis points each. Currently, it stands at 6 per cent.

"The gap between weighted average lending rates and fresh lending rates has declined from peak values of about 85-95 basis points (bps) in 3Q (October-December) FY19 to 65 bps. Increase in fresh lending rates is unlikely from here as most banks focus on higher share of low-yielding retail products and lending to better-rated companies," said Kotak Securities analysts' M B Mahesh, Nischint Chawathe, Dipanjan Ghosh, and Shrey Singh in a report.

All rupee loans sanctioned and credit limits renewed by scheduled commercial banks with effect from April 1, 2016 are priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which is the internal benchmark for such purposes. One basis point equals one-hundredth of a percentage point.

Referring to the latest RBI data, the Kotak report said: "Term deposit rates were flat month-on-month in March 2019 at 6.9 per cent (up 20 bps year-on-year)....Wholesale deposit cost (as measured by certificate of deposit rates) decreased by 20 bps month-on-month in April 2019.”

"Average term deposit rates are broadly similar to term deposit rates (1-2 years) offered by most banks today, slightly lower than rates offered by SFBs (small finance banks). Thus, deposit rates are expected to remain stable over the near term, though gradual rise in the CD (credit-deposit) ratio might push some private banks to raise deposit rates in an environment of strong loan growth."

Lending rates to stablise

The analysts' said fresh lending rates decreased 10 bps month-on-month (mom) in March 2019 to 9.7 per cent, led by drop in lending to NBFCs at a steep pace. This was driven by 20 bps mom drop in fresh lending rates of PSU banks to 9.1 per cent while it dropped 5 bps mom for private banks to 10.6 per cent. Weighted average lending rates were flat mom at 10.4 per cent, similar to past eight months.

"The increase in MCLR rates slowed down in 4Q (January-March) FY19 post robust increase during May-September 2018. Some banks have decreased MCLR rates by 5-15 bps in March-May 2019," the report said.

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