Reserve Bank of India (RBI) Governor Shaktikanta Das expects banks to fully transmit the complete impact of the repo rate hike to customers, as the transmission has not been completed yet.
The RBI’s Monetary Policy Committee (MPC) has increased the repo rate by 250 basis points (bps) since May 2022. Meanwhile, the domestic rate-setting panel kept the repo rate unchanged at 6.5 per cent for the fourth consecutive time on Friday.
“The transmission of the 250-bp increase in the policy repo rate to bank lending and deposit rates is still incomplete. Hence, the MPC decided to remain focused on withdrawing accommodation. The MPC remains highly alert and prepared to undertake timely policy measures, as necessary, to align inflation with the target and anchor inflation expectations,” said Governor Das during the monetary policy statement.
The weighted average domestic term deposit rate on fresh deposits of scheduled commercial banks and the weighted average lending rate on fresh loans have increased by 233 bps and 196 bps, respectively, in the current tightening cycle. The corresponding increase in outstanding term deposit rates and outstanding lending rates is even lower at 157 bps and 112 bps, respectively.
“The deposit repricing is still ongoing for the banking system. As deposit repricing occurs, it will be reflected in the marginal cost of funds-based lending rate (MCLR), which will then be passed on to loans through higher lending rates. Since May 2022, MCLRs have been gradually increasing, but there is still some ground to cover on this front,” said Karan Gupta, director, India Ratings & Research.
Market participants believe that the transmission did not occur because surplus liquidity in the banking system remained high due to several reasons, including the withdrawal of the Rs 2,000 banknote.
“Liquidity overhang was caused by the return of Rs 2,000 banknotes to the banking system, RBI’s surplus transfer to the government, a pick-up in government spending, and capital inflows,” the RBI stated on Friday.
According to Venkatakrishnan Srinivasan, a bond market veteran, founder, and managing partner of Rockfort Fincap LLP, “the banks had surplus liquidity. The transmission did not even occur in the 10-year bond yield. With a 250-bp hike, the yield could have reached 8 per cent”.
