Since May 2022, banks have raised their lending rates several times, as the Reserve Bank of India tightened its monetary policy and raised the repo rate to tame inflation. Indications are that the lending rates of banks will go up further in the coming financial year.
The repo rate has risen to 6.50 per cent from 4.0 per cent in May last year—a 250 basis points increase. According to RBI, the weighted average lending rates on fresh rupee loans and outstanding loans increased by 137 bps and 80 bps respectively, during May-Dec 2022.
Credit ratings agency India Ratings and Research expects banks to raise their marginal cost of funds-based lending rate (MCLR) by 100-150 bps in the financial year ending March 2024.
Despite the rise in lending rates thus far, credit growth has been strong, ranging between 15-17 per cent. However, deposit growth has failed to keep up pace; it has been trending around 10-11 per cent. This mismatch in credit and deposit growth is a key reason behind banks raising their interest rates.
In 2022-23, banks have been managing the gap between deposit and credit by raising certificates of deposits (CDs) and drawing down the money parked in reverse repo or standing deposit facility, pointed India Ratings.
"The drawdown from the reverse repo in 2022-23 to the tune of Rs 5 trillion has enabled banks to address a surge in the gap between incremental credit and deposit, and this will not be available in 2023-24. Therefore, MCLR will show a significant rise," said analysts at India Ratings.
System liquidity is expected to tighten in the coming weeks as the financial year end approaches, due to several factors like advanced tax payment, GST (goods and service tax) payment and TLTRO (targeted long term rupee operations) maturing.
In the coming financial year, banks will have to focus more on fresh deposits for incremental funding. Deposit rates have already gone up around 150-200 bps, which has helped drive a 75 bps increase in aggregate deposits in the system, India Ratings noted.
Incremental deposit creation by way of net foreign exchange flows will also remain limited at around Rs 60,000 crore.
A "tepid" balance of payments (BoP) surplus of around Rs 60,000 crore would not bring any "reasonable improvement" in aggregate deposit, the ratings agency felt.
"Therefore, even if the policy rate remains stable for FY24, rates in the banking system will continue to face upward pressure," it added.
The retail inflation rate continues to trend above Reserve Bank's upper end of the 2-6 per cent target band. CPI (consumer price index) inflation in February stood at 6.44 per cent, compared with 6.52 per cent in January. Core inflation has also been sticky for some time now. The inflation trending above RBI's target band has raised expectations that the monetary policy committee of the RBI will raise rates yet again by around 25 bps in the next meeting in April.
"With domestic core inflation still high and the possibility of continued (though at a moderate pace) rate hike by the Federal Reserve amid elevated inflation, there is an increased possibility of another 25 bps rate hike by RBI in the April meeting," said Rajani Sinha chief economist at CARE Ratings.
Another hike in repo rate (the rate at which RBI lends banks) will also pressure banks to raise their interest rates.
