Lending rates to go up, deposit rates to remain stable in 2024, say experts

RBI's MPC on December 8 left its key interest rate unchanged for the fifth consecutive meeting

Lending rates will go up by 25-50 bps and deposit rates will remain the same till the second quarter of FY2024, said experts on the outlook for the new year.

"After the second quarter in 2024, interest rates should also start softening. However, the banks will try to do some revisions (up or down) to either garner more deposits or to reduce their cost of deposit," said one of the senior bankers of Yes Bank who does not want to be named.

Rating agency ICRA has a positive outlook on the banking sector, driven by comfortable asset quality levels, with both corporate and retail portfolios performing well in terms of delinquencies, resulting in limited net-NPA additions.

Furthermore, credit growth is expected to remain healthy at 12-13 percent in FY2025, driven by strong demand in the services and retail segments.

Anil Gupta, Senior Vice President, Co-Group Head of Financial Sector Ratings, ICRA, said, "Given the liquidity conditions are likely to remain tight, driven by high credit growth, the upward pressure on deposit rates is likely to sustain at a system level".

Gupta further added that the banks could hike deposit rates till first quarter of calendar year 2024, however, this is expected to be not more than 15-20 bps on longer tenure deposits, while there could be a higher increase on shorter-term deposits.

"This shall continue to result in an upward repricing of the deposit base and will need a similar, 10-20 bps hike in Marginal Cost of Funds based Lending Rates (MCLR) linked loans, while repo-linked loans are unlikely to rise in the near term, given the expectations that the policy rates have peaked out and could be cut in quarter of calendar year 2024," Gupta added.

N Kamakodi, MD & CEO of City Union Bank, said that they are expecting the rate to be by and large stable during the major part of the year 2024.

"And towards the end of the year signals of a decreasing interest cycle will start," he said.

Analysts have predicted that the gross fresh NPA (Non Performing Assets) generation for the banking system is expected to witness a mild increase in FY2025 as portfolios gradually season and the corporate book asset quality is expected to hold up and slippages are likely to remain granular.

Sanjay Kumar Agarwal, Senior Director at CareEdge Ratings, said,"While the lending rate on fresh loans has crossed the pre-pandemic levels, the rate on outstanding loans is still below the same (compared with March 2020). The NIM trajectory is expected to remain stressed and moderate even further in the later part of FY24 as competition would also cap the interest rates charged at a certain level. Going into 2024, market volatility is likely to persist. We expect RBI to start rate cuts after Q1FY25 when quarterly inflation is projected to approach the 4% target.”

Lending rates in 2023

During FY2023, the median 1-year MCLR rates for private and public sector banks rose by ~30-45 bps, of which the increase between April-December stood at ~15-18 bps, which points towards relatively limited hike/increase in MCLR rates since March 2023.

"Bond yields have continued to remain benign and credit spreads have also not expanded meaningfully, thereby constraining the ability of banks to hike lending rates amid rising deposit costs," said ICRA analysts.

Gupta further added that this is also reflected in the lower increase in weighted average lending rates on loans compared to a weighted average increase in term deposit rates of the banks.

MPC and interest rates

The Reserve Bank of India’s Monetary Policy Committee (MPC) on December 8 left its key interest rate unchanged for the fifth consecutive meeting, citing a potential resurgence in inflation and signalling that price stability remained its primary objective.

"MPC voted unanimously to leave the repo rate unchanged at 6.5 percent," RBI Governor Shaktikanta Das said as he shared the outcome of the bi-monthly policy review.

India's headline retail inflation rate surged to 5.55 percent in November, according to data released by the Ministry of Statistics and Programme Implementation on December 12, thanks to the combination of an unfavourable base effect and a rise in prices of key food items.

"The overall inflation outlook is expected to be clouded by volatile and uncertain food prices and intermittent weather shocks," the RBI Governor Shaktikanta Das said, as per the minutes of the meeting released on December 22.

He said that a resurgence of vegetable price inflation is likely to push up food and headline inflation.

"We have to remain highly alert to any signs of generalisation of price impulses that may derail the ongoing process of disinflation," he said.