RBI’s lending rate hike good for banking sector: SBI Research

The Reserve Bank of India's (RBI) decision to hike the key lending rates will be ultimately good for the banking sector, SBI Research said in its Ecowrap report today. It said the central bank may go for other rounds of rate hikes in June and August and that a 75 basis points rate hike in FY 2022-23 looks imminent.

"The risk is getting re-priced properly. The situation is different than during the global financial crisis wherein the lending started increasing aggressively (FY05 onwards) much before the rate hike cycle began (Mar’2010 till Oct’2011). Currently, the rate hike cycle has begun and now the bank lending will increase factoring in the risk," says Soumya Kanti Ghosh, group chief economic adviser, SBI Research.

The RBI, in an off-cycle meet of MPC, hiked the benchmark repo rate by 40 bps and announced another 50 bps hike in cash reserve ratio (CRR).

With this, the standing deposit facility (SDF) rate stands at 4.15% and the marginal standing facility (MSF) rate and the bank rate are at 4.65%. The MPC decided to remain accommodative, focusing on its withdrawal to ensure inflation remains within the target while supporting growth.

Including the RBI’s yesterday’s decision, 21 countries have increased interest rates so far in April and May this year. Of these 21 countries, 14 countries hiked rates more than or equal to 50 bps.

The US also announced a 50 bps rate hike in its meet on Thursday -- its biggest hike since 2000. It's also the first time in 16 years that the US Fed hiked borrowing costs at two consecutive meetings.

During the pandemic, RBI had reduced the policy repo rate by 115 bps in 2-instances -- first 75 bps in March 2020 and thereafter 40 bps in May 2020 -- and it has been kept unchanged since then.

The RBI has said its monetary policy will focus on a careful and calibrated withdrawal of pandemic-related extraordinary accommodation to check inflation-growth dynamics. "This indicates that by the end of Mar-23, repo rate may reach the level of 5.15%," says the SBI Research report.

The central bank has also decided to increase the cash reserve ratio (CRR) by 50 basis points to 4.5% of net demand and time liabilities from the fortnight beginning May 21, 2022. "The withdrawal of liquidity through this increase in the CRR would be of the order of ₹87,000 crore," the note adds.

Impact of rate hike

More hikes: With the current hike of 40 bps in repo rate to 4.40%, the RBI, it seems, will continue to increase the rates and may reach the pre-pandemic level of 5.15% by March 2023-end, says the note.

Interest rate hike: Retail loans are benchmarked to an external rate -- mostly to RBI’s repo rate -- with a quarterly reset clause. The loans benchmarked to repo rate may now increase directly in the range of 30-40 bps, as banks don’t keep a wider spread in retail loans to remain competitive.

As of December 2021, around 39.2% of the loans are benchmarked to external benchmarks. The repo rate hike will eventually increase interest costs on consumers and may impact from the next quarter onwards.

Increase in MCLR: Though the share of marginal cost of lending rate (MCLR)-linked loans has declined over a period but still has a major share at around 53%. “With the rise in CRR and an expected hike in benchmark rates, there would be a marginal increase in MCLR due to negative carry. Further, if banks raise the deposit rates, the cost of funds will increase and subsequently MCLR will increase,” the note adds.