Banks see no reason to tweak lending rates post RBI’s policy review

RBI Governor Shaktikanta Das, in his MPC statement said that the MPC’s stance of withdrawal of accommodation should be seen in the context of incomplete transmission of rates.

Bank lending rates are unlikely to change after the monetary policy committee (MPC) decided to leave the key interest rates unchanged in the February 2023 policy meeting, bankers and industry experts said, adding that the lending rates have peaked for most lenders.

"We see that lending rates of banks are not expected to rise as they have peaked. Banks have seen good growth in the past few years. We see growth across segments," said Krishnan, MD & CEO, of Tamilnad Mercantile Bank.

Shekhar Bhandari, President, Global Payments, Kotak Mahindra Bank, said that banks have offered rates which are comfortable for customers in small and medium enterprises (SME), corporates and other segments which have led to comfortable growth.

On February 8, the RBI’s monetary policy committee kept the repo rate unchanged at 6.50 percent. The MPC has kept the repo rate at 6.50 percent since February 2023, when it was increased from 6.25 percent to 6.5 percent. Since May 2022, the central bank has raised the repo rate by 250 basis points (bps).

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One bps is one hundredth of a percentage point.

Incomplete rate transmission

The central bank has been nudging banks to pass on the central bank’s rate cues to customers citing inadequate monetary policy transmission. RBI Governor Shaktikanta Das, in his MPC statement said that the MPC’s stance of withdrawal of accommodation should be seen in the context of incomplete transmission of rates.

“Our stance of withdrawal of accommodation should be seen in the context of incomplete transmission,” Das said.

In the October 2023 MPC meeting, RBI Governor Shaktikanta Das highlighted that the transmission of repo linked rate by banks to the customers is incomplete. “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 post-MPC press conference.

Moneycontrol in December 2023 reported that as per RBI data, the weighted average domestic term deposit rate of banks increased by 233 basis points (bps) and the weighted average lending rate 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.

Sanjay Agarwal, Senior Director, CareEdge, highlighted that rate hike has peaked for banks. "Since May 2022, RBI has hiked the repo rate by 250 bps which has led to banks raising their rates. And banks have maxed out on increasing their lending rates," Agarwal said.

RBI rate cut in mid-FY25

On January 18, RBI Governor Shaktikanta Das, during an interaction with a private television channel had said: “At this time, the topic of rate cut is not on our table, it’s not even under discussion. Our focus is to remain actively disinflationary, to bring the inflation to 4 percent.”

Dinesh Khara, State Bank of India Chairman, said that the RBI belongs to this school of thought. “Expect rate cuts in the second half of 2024,” Khara said at the post-results media conference.

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Additionally, economists also highlighted that the central bank has been slowly taking actions that signal that rate cuts will begin from mid-FY25.

Gaura Sen Gupta, Economist, IDFC First Bank, highlighted that there has been a change in policy preference from keeping overnight rates closer to the marginal standing facility (MSF), to keeping overnight rates between MSF and repo rate.

“The first step of moving overnight rates towards the repo rate has begun. The next step will be policy rate cuts which are expected to start from June or August onwards. Growth conditions have held up, which has provided policymakers with the space to focus on aligning inflation with the 4 percent target,” Sen Gupta said.