bank interest: Deposit rates unlikely to match rise in lending rate

Lending rates went up immediately following Reserve Bank of India’s 40 basis points repo rate increase but deposit rates remained more or less sticky, and are likely to remain so till the time the market continues to have surplus liquidity, country’s top bankers said. There could just be nominal changes.

The external benchmark-linked framework makes transmission of monetary policy signals automatic in terms of lending rates, but deposit rates are functions of credit demand as well as the prevalent liquidity situation.

“As long as liquidity remains surplus in the system, there is no need for banks to compete for mobilising deposits and therefore deposit rates either remain the same or have seen nominal changes,” a chief executive of a mid-size public sector bank said.

He said that lending rates linked to external benchmarks rose 20 basis points on an average. The share of external benchmark linked loans was about 40% of total loans till December last year, RBI data showed.

Average surplus liquidity in the system hovers around Rs 4-4.5 lakh crore. The yield for the benchmark 10-year government bond is hovering around 7.30% at present without showing much volatility, reflecting a comfortable fund flow.

This means savers will continue to suffer widening negative real interest rates amid spiralling inflation.

Depositors now earn 5-5.5% on one-year deposits, while commodity prices are increasing at near 8% rate.

The consumer price index (CPI), which acts as the benchmark for monetary policy makers, rose to an eight-year high of 7.8% in April while the wholesale price index rose to 15.1%. RBI said that direct pass-through of the rise of global commodity prices to CPI takes a longer transmission lag, meaning more pain is waiting for consumers in terms of price rises.

“When the repo rate changes and the loans are linked to an external benchmark, which is the repo rate or MCLR, there is automatic transmission and hence lending rates go up immediately,” said Madan Sabnavis, chief economist with

. “Deposit rates are a function of the requirements of banks. As long as demand is not robust, taking deposits at high cost will pressurize spreads. Hence we have seen specific banks increasing rates only in certain buckets.”

RBI had injected a total of Rs 17.2 lakh crore liquidity into the system since February 2020, which was 8.7% of the nominal GDP of FY21 and siphoned out 70% of that overhang till March 2022. RBI announced a gradual withdrawal of liquidity over a multi-year time frame.