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Informist, Wednesday, Oct. 9, 2024

 

--RBI Das: Transmission of rates to credit markets has been satisfactory 
 

MUMBAI – Reserve Bank of India Governor Shaktikanta Das, while announcing the outcome of the Monetary Policy Committee meeting, said that the transmission of rates to the credit market has been satisfactory. However, Das is not sure whether deposit or credit rates have peaked.

 

While addressing the post-policy press conference, Das said, "On the policy repo rate, the decision of the MPC will depend on the growth-inflation trajectory. The lending rates, deposit rates and the money market rates will naturally move in tandem or in response to the policy repo rate. I can't say if the deposit rates or credit rates have peaked. It is for the banks and non-bank lenders to decide. These are commercial decisions, in response to overall economic conditions."

 

In the current tightening cycle, between May 2022 and February 2023, the RBI hiked the policy repo rate cumulatively by 250 basis points. The Monetary Policy Committee on Wednesday kept the repo rate unchanged at 6.50% and changed the stance to 'neutral' from 'withdrawal of accomodation'.

 

As per the Monetary Policy Committee's report, the transmission to lending and deposit rates of banks continued in Apr-Sept, with the latter adjusting faster in the wake of persistent credit demand and the widening gap between credit and deposit growth.

 

In terms of lending rates, during Apr-Sept, the one-year marginal cost of lending rate of scheduled commercial banks increased by 10 bps, which indicates a slightly higher cost of borrowing, the report said. 

 

During Apr-Aug in the current financial year, the weighted average lending rates on fresh and outstanding rupee loans increased by 4 bps and 6 bps, respectively. Between May 2022 and August 2024, the weighted average lending rates on fresh and outstanding rupee loans of scheduled commercial banks increased by 190 bps and 119 bps, respectively, the report said.

 

On the deposit rates front, the weighted average domestic term deposit rates on outstanding rupee deposits of scheduled commercial banks increased by 4 bps in Apr-Aug. However, it moderated by 16 bps for fresh deposits.

 

Banks have increased their rates on fresh retail deposits by 21 bps during the same period. The weighted average domestic term deposit rate on fresh and outstanding deposits of scheduled commercial banks increased by 243 bps and 190 bps, respectively, from May 2022 to August 2024.

 

The report also said that the transmission to weighted average lending rates on fresh rupee loans of public sector banks was higher than private sector banks, while it was lower for outstanding loans. Overall, the lending rates of private sector banks remained above those of public sector banks.

 

It also said that the maximum pass-through to lending rates was seen in the case of foreign banks. "The maximum pass-through to lending rates was witnessed in the case of foreign banks, reflecting their higher share of low-cost and wholesale deposits of lower maturity. Moreover, the higher share of external benchmark-based lending rate (EBLR)-linked loans in foreign banks further facilitated monetary policy transmission," the report said. The proportion of loans for foreign banks linked with the external benchmark-based lending rate was 90.1% as at end-June.

 

The share of loans linked with the external benchmark-based lending rate in the outstanding floating rate loans increased to 57.5% as of Jun. 30 from 56.6% as of Mar. 30. While, the share of MCLR-linked loans fell to 38.6% from 39.2% in the same period. "The increasing share of EBLR-linked loans with shorter reset periods aided transmission to WALRs (weighted average lending rates) of SCBs (scheduled commercial banks) in the current tightening cycle," the report said.

 

The share of loans linked with external benchmark-based lending rate is higher among private banks as compared to public sector banks. "The persistence of loans linked to MCLR and other legacy rates – based on internal benchmarks and having longer reset periods – are impediments to faster monetary policy transmission," the report said.

 

In order to bridge the gap between credit growth and deposit growth, lenders, especially public sector banks, raised the rates on term deposits. This resulted in a decline in the share of current account and savings account deposits in total deposits, which hit the margins of banks. 

 

"Since Q3:2022-23 (Oct-Dec), interest rates on various small savings instruments have been cumulatively increased in the range of 70-250 bps by the government, with these adjustments, the rates on most of the instruments are now aligned with the formula-based rates, except for those on public provident funds and post office recurring deposits," the report said.

 

When asked if higher interest rates could potentially impinge on growth, Das said, "Growth continues to be very robust. Investment intentions are visible. Right from February last year, it has been 1.5 years, the growth is holding firm and steady. It won't be correct to say that higher interest rates are impinging growth," Das said. 

 

The Reserve Bank of India retained its GDP growth forecast for 2024-25 (Apr-Mar) at 7.2%, but cut its projection for Jul-Sept to 7% from an earlier estimate of 7.2%. The retention of the growth forecast for the current financial year comes after data released in August showed India's GDP growth fell to a five-quarter low of 6.7% in Apr-Jun, 40 basis points lower than the RBI's projection of 7.1%.  End

 

Reported by Kshipra Petkar

Edited by Manisha Baxla

 

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