Banks, NBFCs hike lending and deposit rates as RBI pushes for monetary transmission

Rate transmission is important as actions to curb or increase demand are effective only when banks pass on the rate cues to customers.

A clutch of banks and non-banking financial companies (NBFCs) have upped their lending and deposit rates in recent weeks following the central bank's call for increased monetary policy transmission, a Moneycontrol analysis of the data and commentary showed.

For example, Bank of Baroda on April 10 increased its lending rates by 5 basis points across selective tenures. HDFC Bank too increased its repo-linked home loan interest rates by 10-15 basis points to a range between 9.05 percent to 9.8 percent in March 2024.

Some NBFCs hiked their interest rates on fixed deposits (FDs). Bajaj Finance on April 9 hiked its interest rates by 60 bps on most tenures. Similarly, Shriram Finance raised its interest rates on FDs by 0.05 to 0.20 bps.

One basis point is one-hundredth of a percentage point.

Experts said lenders are working at increasing their lending and deposit rates after RBI’s nudge. RBI Deputy Governor J Swaminathan said transmission was playing out and would happen over a period of time. “ Rate transmission is happening and we would like it to continue in that manner,” he said.

Vijay Singh Gaur, Lead Analyst, BFSI, CareEdge, said lenders are slowly working on increasing their rates. “Rate transmission will happen with time as lenders are slowly looking at pushing their different rates to their customers,” Gaur said.

Call for rate transmission

A Moneycontrol analysis of the weighted average domestic term deposit rate (WADTDR) and weighted average lending rate (WALR) showed that WADTDR of banks increased by 233 bps and the WALR on fresh loans rose by 196 bps in the current tightening cycle. The corresponding increase in outstanding term deposit rates and outstanding lending rates of banks was even lower at 157 bps and 112 bps, respectively.

The weighted average domestic term deposit rate is an indicator of the average interest rate paid by banks on term deposits to customers. The weighted average lending rate is the interest rate charged by banks on all loans.

RBI Governor Shaktikanta Das said in the October 2023 MPC meeting that the repo rate hike transmission is not reflected in banks’ rates. “The transmission of the 250 bps increase in the policy repo rate to bank lending and deposit rates is still incomplete,” Das said during the October 2023 Monetary Policy Committee press conference.

And in the latest MPC meeting on April 5, RBI Deputy Governor Michael Patra said that some rate transmission is happening through banks. “If you look at transmission from April 2023 to February 2024, there is still transmission going on. We are still seeing some transmission going through. We feel that (if) mobilising of deposits takes place at higher and higher rates, there will be more transmission,” Patra said at the post MPC press conference.

Rate transmission is important as actions to curb or increase demand are effective only when banks pass on the rate cues to customers. Effective rate transmission is crucial for the central bank’s inflation management.