With the Reserve Bank of India (RBI) raising the benchmark repo rate by 25 basis points in its third bi-monthly monetary policy on August 1, your home loan rates are likely to go up albeit at a slower pace this time. However the good news is that you are likely to earn more on your deposits.

Lending rates

Several players have announced a rise in lending rates. Housing Development and Finance Corporation (HDFC Ltd), the country’s largest mortgage lender, has increased its home loan rates by 20 basis points (0.20 per cent) a day after the RBI policy. HDFC said that it has increased its benchmark retail prime lending rate (PLR) by 20 basis points with effect from August 1, 2018. All floating rate loans are linked to the retail PLR. Among banks, Kotak Mahindra Bank, Union Bank and Karnataka Bank raised their lending rates by 5-10 basis points. However top banks such as State Bank of India (SBI), Bank of Baroda (BoB), Punjab National Bank (PNB), ICICI Bank and HDFC Bank have so far not announced a hike in lending rates post the RBI policy.

HDFC CEO Keki Mistry recently hinted at a possible hike in rates. “If the cost of funds increase as a result of the increase in the lending rates, then I am sure all the mortgage companies and banks will necessarily pass on the rate hike to the consumers.”

Sameer Narang, chief economist at Bank of Baroda said, “While a few banks have raised deposit rates, they raised it before the monetary policy. Credit growth has outpaced deposit growth in the last three to four months and therefore there is a pressure on liquidity forcing banks to raise deposit rates. When deposit rates rise, lending rates also tend to move up as they are linked to the formula for Marginal Cost of Funds based Lending Rates. However the extent of increase in MCLR based lending rates has been less than the deposit rates. MCLR consists of all your outstanding liabilities such as term deposits, current account and saving deposits. The rates have not changed for current account and saving deposits but have increased on term deposits. So lending rates will rise over the time.”

Deposit rates are rising faster

Just a day before RBI’s announcement, on July 31, SBI had raised the term deposit rates on select maturities by 5-10 basis points. Bank of Baroda and Indian Bank also made rate hikes through July, with the former hiking its MCLR by 5 basis points and the latter by 10 basis points across tenors. The country’s largest private sector bank HDFC Bank also raised fixed deposit rates in the range of 0.10 per cent to 0.60 per cent (10 basis points to 60 basis points) on various maturities this week.

HDFC Bank has revised FD interest rates for deposits ranging from below Rs one crore to less than Rs 5 crore. HDFC Bank has raised the interest rate on term deposits with maturity ranging between 6-months-one-day to 5 years. Deposit of 6-9 months maturity would earn 6.75 per cent, 40 basis points higher than the previous rate. The interest rate on fixed deposits of 9-months-three-days to less than 1 year has been raised by 60 basis points while for one year it has been increased by 40 basis points to 7.25 per cent. Fixed deposits beyond 2-years-one-day to 5 years will earn 10 basis points higher rate of interest than the previous. The new rates of HDFC Bank are effective Monday.

Last month, State Bank of India (SBI), the country’s largest lender raised interest rates by 5-10 basis points on retail deposits (those below Rs one crore), across longer maturity baskets. While interest rates on deposits of tenures longer than two years have gone up by 0.1 per cent, the hike on tenures of one year to less than 2 years stands at 0.05 per cent. On the other hand, SBI slashed interest rates on bulk deposits (deposit amount over Rs one crore) for tenures under two years by 30-45 basis points. However, bulk deposits of Rs one-10 crore as well as over Rs 10 crore will now earn 6.85 per cent, as much as 60 basis points higher, on the 5-10 years tenure. Another state lender Canara Bank too has recently raised fixed deposit rates.

Benchmark lending rate

The RBI last week raised the benchmark short-term lending rate (repo rate), at which it lends to commercial banks, by 0.25 percentage point to 6.5 per cent citing inflationary concerns. This is the second rate hike undertaken by RBI in two months against the backdrop of various underlying inflationary concerns ranging from domestic factors like the announcement of a hike in Minimum Support Prices (MSP), rising Household Inflation Expectations, temporal monsoon to international factors like geopolitical tensions and concerns on elevated oil prices.

Retail inflation, which is factored in by the central bank’s monetary policy committee, spiked to a five-month high of 5 per cent in June on costlier fuel. The government has mandated RBI to keep inflation at 4 per cent (+/- 2 per cent).

Rating agency Care Ratings in a study assessed the impact of RBI’s policy framework in the past 6 years (October, 2011 to August, 2018) on the interest rates (lending + deposit rates) of scheduled commercial banks. Given the recent rate hike, the idea was to study how the banks have been reacting to rate hikes in the recent past and what are the possible actions which can be undertaken by the banks during the course of next few weeks.

The study found that in the last six years, the RBI increased rates on 6 occasions (including August 1), all of which were of the order of 25 bps. The study found that in an increasing interest rate scenario, banks react faster on lending rates compared with deposit rates and it was also observed that the quantum of transmission of the lending rate is more than the deposit rates. However, in the last two rate hikes the quantum of transmission of the deposit rates is more than the lending rates.

“Consider the increase in interest rates of June 6 when RBI increased the repo rate by 25 bps to 6.25 per cent. From the date of announcement of the rate hike till the next monetary policy meeting, the deposit rates have increased on an average by 13 bps, while the MCLR rate has increased by 5 bps. This quicker transmission in the deposit rate can be partly attributed to the reversal of interest rate regime witnessed in the recent months,” said Madan Sabnavis, chief economist at Care Ratings.

There has been an improvement in the bank credit off-take in the current fiscal year. On a year-on-year (y-o-y) basis, as of July 20, 2018, bank credit off-take has grown by 12.4 per cent in FY19 compared with the 5.8 per cent growth in FY18. Deposit inflows have risen by 8.3 per cent in the current fiscal year, lower than the 9.9 per cent growth a year ago.

“In an environment where the banks are stressed under the NPA-burden, the rate hike is an incentive for the banks to push up their MCLR and improve their returns. However, it is important to note that in a rising interest rate scenario, as corporate bond yields react faster than MCLR banks would be a preferred option for the borrowers,” added Sabnavis.