Major banks increase lending rates by 190 bps after RBI’s repo rate hike

As the Reserve Bank of India (RBI) hiked the repo rate in four tranches since May 2022, all major banks have increased their external benchmark-based lending rates (EBLRs) by 190 basis points (bps). The RBI hiked the repo rate four times to contain the inflation and there are expectations that another repo rate hike is on the cards. The Monetary Policy Committee (MPC) of the central bank, which gives recommendations to the bank regarding the interest rates, is expected to meet again early next month.

By October-end 2022, banks have increased their EBLRs by 190 bps in tandem with the increase in the policy repo rate since May 2022, according to an RBI article. Further, banks have also increased their 1-year median marginal cost of funds-based lending rate (MCLR) by 85 bps from May to October 2022.

From 1 October 2019, all banks have to lend only at an interest rate linked to an external benchmark, such as RBI's repo rate or Treasury Bill yield. While all the major banks have increased the lending rates in tandem with the RBI repo rate hike, they have raised the interest rates on term deposits by a much lower margin.

According to the RBI article, the transmission to lending and deposit rates of private sector banks (PVBs) has exceeded that of public sector banks (PSBs) in the current tightening period. The credit growth of private sector banks has also been more than that of the public sector banks.

In view of the increase in credit demand, private banks have increased their lending and deposit rates to maintain higher net interest margins (NIMs). The next meeting of the MPC is scheduled during December 5-7, 2022.

(With agency inputs)