The tightening of monetary policy has led to a more significant increase in term deposit rates compared to lending rates. Since May 2022, the Reserve Bank of India’s (RBI) monetary policy committee (MPC) has raised the policy rate by 250 basis points (bps). This has caused a notable rise in deposit rates but has had a less dramatic effect on loan rates.
Following the policy rate hike, weighted average domestic term deposit rates (WADTDRs) have surged. For new term deposits, rates increased by 243 bps, and for existing deposits, the rise was 188 bps. This indicates that depositors have seen a substantial boost in the interest they earn on their deposits.
Lending rates lag behind
In contrast, the impact on lending rates has been relatively modest. The weighted average lending rates (WALRs) for new rupee loans rose by 181 bps, while existing loans saw an increase of 119 bps from May 2022 to June 2024. Similarly, the one-year marginal cost of funds-based lending rate (MCLR), which influences loan rates, increased by 170 bps over the same period.
State-owned banks have experienced a greater rise in deposit rates compared to private banks. However, these state-owned banks have seen smaller increases in loan rates compared to their private sector counterparts. This trend was also evident during periods of interest rate cuts, where deposit rates fell more significantly than lending rates.
Deposit rates are adjusted more directly in response to changes in the policy rate, which has made them more responsive to rate hikes. On the other hand, lending rates, which are influenced by external benchmarks and other factors, do not adjust as swiftly. While short-term deposit rates have risen to attract more funds, this increase is unlikely to significantly affect overall costs.
Deposit growth
Meanwhile, in absolute terms, deposits have expanded by Rs 11.1 lakh crore over the last 8 months. Deposits would continue to be prominent in FY25 as banks intensify efforts to strengthen their liability franchise. The banks are also sourcing funds via the certificates of deposits (at a relatively higher cost) which have shown significant traction. This focus aims to prevent constraints on credit uptake due to deposit growth.
The CD ratio has been generally hovering around 80% since September 2023. The CD ratio saw a decrease of 5 bps, compared to the previous fortnight, and stood at 79.3% for the fortnight (July 26, 2024). If we exclude the merger impact, the CD ratio for the current fortnight stood at 77.3% compared to 77.6% on July 28, 2023.
