rbi lending rate hike: Borrowing to pinch more as RBI hikes lending rate

Increase in monthly outgo for home, auto, personal loans are set to pinch borrowers yet again, after the Reserve Bank of India hiked the benchmark lending rate the third time in three months. Most top banks including , , among others will automatically pass on the Friday’s 50 bps hike to external benchmark linked loans, used largely for pricing retail loans. More than half of the banking system loans are linked to external benchmarks. RBI has hiked repo rate by 140 bps since May this year.

“Bank lending rates have been increasing in tandem with repo rate hikes, higher deposit and market rates,” Shanti Ekambaram, Group President & Whole Time Director Designate,

. “Lending rates are likely to go up in response to today’s rate hike. Existing borrowers linked to repo rates will see higher outgo as the rates get transmitted. So far consumption demand has been stable despite rate hikes in homes, cars, consumer durables, travel etc. As rates trend higher, some segments could see an impact on demand. “

The weighted average lending rate (WALR) on fresh rupee loans of scheduled commercial banks, which increased by 34 basis points (one bps is 0.01 percentage point) from April to 7.86% in May, rose another 8 bps to 7.94% in June. WALR on outstanding rupee loans of SCBs increased by 7 bps to 8.79% in May and by 14 bps to 8.93% in June 2022.

Meanwhile, RBI governor Shaktikanta Das on Friday nudged banks towards hiking deposit rates and said that banks shouldn’t repeatedly rely on “central bank money to fund credit growth. At the banking system level, deposit growth has been a little over 8% and the gap with credit growth which is growing at 14% has widened to more than 500 basis points.

“The most likely scenario is that the impact of the rate hike will be passed on by the banks to the deposit rates,” Shaktikanta Das, governor, RBI said. “Already the trend has started, quite a few banks have hiked their deposit rates and that trend will continue. When there is a credit offtake, obviously the banks can sustain and support that credit offtake only if they have higher deposits. They cannot be relying on central bank money on a perennial basis to support credit offtake, they must mobilise their own resources and own funds.”

As per RBI data, the weighted average domestic term deposit rate on outstanding rupee term deposits of banks increased by 4 bps in May to 5.07% and by 6 bps to 5.13% in June 2022. This at a time when the RBI has already hiked key policy repo rate by 140 bps since May.

Experts fear that funding challenges for banks could rise if deposit rate growth continues to lag, as even the RBI is tightening system level liquidity which is around Rs 3.8 lakh crore in June-July, down from over Rs 6.7 lakh crore in April-May.

“The main issue we believe is that RBI has hiked CRR, keeping liquidity tight which is affecting base money growth,” said Suresh Ganapathy, associate director, Macquarie Capital. “Add to that, our feedback from bankers suggest that many corporate treasuries prefer parking in liquid funds that offer overnight liquidity at higher rates rather than park a 7-day deposit with a bank at lower rates. So, you not only get say 25-50 bps higher rate on your money, you can also withdraw anytime rather than lock-in for 7 days with banks.

Bank credit continued to witness robust growth at 14% year-on-year, expanding by a significant 750bps, for the fortnight ended July 15, 2022, up from 6.5% in the year-ago period. For the same period, deposits registered a growth of 8.4% y-o-y. The Credit to Deposit (CD) ratio which has been increasing since October 2021, stood at 73.1%, expanding by 365 bps y-o-y from the similar fortnight last year.

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