Deposit, Lending Rates To Not Change In Line With Key Policy Rate Cut

Even though the Reserve Bank of India in its sixth bi-monthly monetary policy review on Thursday lowered its benchmark repo rate by 25 basis points to 6.25%, the same may not reflect in deposit or lending rate any time soon. Repo or repurchase rate is the rate of interest charged by the RBI for money lent to commercial banks. In a general case, the lowering down of key policy rate is seen to be positive for borrowers and negative for depositors.

Lending rates

The transmission of repo rate cut to lending rates is historically at a slower pace, and this time around there will be no immediate impact as banks may not decrease deposit rates. And if deposit rates will see no change, borrowing or lending rates are also unlikely to go down. Since April 2016, in respect of new loans, borrowing rate is decided on the basis of marginal cost of funds-based lending rate (MCLR). The deposit rate is reflective of the cost of funds for banks and if deposit rate does not goes down there is no reduction in the cost of funds for banks and as a result, the lending rate will also not be lowered.

Existing borrowers for whom the date of reset of loan is due in the near future are also unlikely to benefit from the rate cut. The new lending rates become applicable from the reset date of loans that generally happens once in a year.

Deposit rates

Banks are unlikely to bring down deposit rates anytime soon, the primary reason being high credit demand, with growth in deposits at a relatively slower pace this year that is not enough to meet the demand for credit. As a per a Crisil report, in the next two financial years growth in bank credit is likely to be 13-14% and for it banks will need to raise as much as Rs. 25 trillion over the next two FYs. This would hence force banks to increase interest rates on deposits.

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