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Banking industry

Interest Rates to Continue Upward March as RBI T tightens Policy

Strategic Insights

— 2 min read

The Reserve Bank of India (RBI) has continued to hike the repo rate to combat inflation and suck out excess liquidity, with analysts at CareEdge expecting interest rates to continue their upward march. This tightening of monetary policy is aimed at bringing down inflation, which remains above the RBI's 2-6% tolerance band. As of July, retail inflation stood at 6.71%, a slight decrease from June's 7.01%. The RBI's Monetary Policy Committee has undertaken a total of 140 basis point repo rate hikes since May.

Key Takeaways:

  • The RBI's repo rate hikes have led to an increase in lending rates, with the weighted average bank lending rate (WALR) on loans for public sector banks (PSBs), private sector banks (PVBs), and small and medium-sized banks (SCBs) increasing by 16 bps, 9 bps, and 14 bps, respectively, in June.
  • While lending rates have been increased in tandem with the RBI's policy rate hikes, deposit rates have risen at a slower pace, with PSBs, PVBs, and SCBs witnessing a rise of 4 bps, 6 bps, and 6 bps, respectively, in June.
  • Banks are expected to narrow the divide between lending and deposit rates as reducing liquidity and rising credit offtake create demand for deposits.
  • Analysts at CareEdge anticipate that the rise in deposit rates will pick up steam given the fact that credit growth has picked up and liquidity is narrowing in the banking system.
  • The spread between the 10-year G-sec yield and the lending rates for SCBs came in at 1.5% in June, rising by 15 bps compared to the previous month.
  • The elevated yields on G-sec bonds are encouraging corporate borrowers to shift borrowings to the banking system from the capital market.

Statistics:

  • The RBI's Monetary Policy Committee has undertaken a total of 140 basis point repo rate hikes since May.
  • Retail inflation stood at 6.71% in July, a decrease from June's 7.01%.
  • The weighted average bank lending rate (WALR) on loans for PSBs, PVBs, and SCBs increased by 16 bps, 9 bps, and 14 bps, respectively, in June.
  • Deposit rates for PSBs, PVBs, and SCBs witnessed a rise of 4 bps, 6 bps, and 6 bps, respectively, in June.
  • The spread between the 10-year G-sec yield and the lending rates for SCBs came in at 1.5% in June, rising by 15 bps compared to the previous month.

Sources:

  • "RBI hikes repo rate by 50 bps to 5.9% to tame inflation; GDP growth to be 7.2% in FY23." (CareEdge)
  • "RBI MPC hikes repo rate by 35 bps to 5.4% to combat inflation; GDP growth to be 7.5% in FY23." (CareEdge)
  • "RBI hikes repo rate by 35 bps to 5.4% to combat inflation; GDP growth to be 7.3% in FY23." (IE Online Media Services Pvt. Ltd.)
  • "RBI's monetary policy, GDP growth, inflation, policy rate, banking sector, credit growth, liquidity." (Contify.com)

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