The Reserve Bank of India’s (RBI) action in raising rates appears more effective now than in the past, as commercial banks continue to increase lending rates aggressively, amidst tight liquidity and rising cost of deposits.
“The improved transmission was a result of the rate hikes being complemented by tight money market liquidity. This raised bank funding costs substantially, resulting in faster increase in lending rates,” said a note by Sonal Varma and Aman Mohunta, economists with Nomura Financial Advisory and Securities.
RBI had raised its repo rate, at which banks borrow from it, by 275 basis points to 7.5 per cent since March 2010. The rate is still 150 bps below its 2008 peak of nine per cent.
In response, the country’s largest lender, State Bank of India, raised its benchmark prime lending rate (BPLR) by 225 bps to 14 per cent during this period. SBI’s current BPLR has also surpassed its 2008 peak of 13.75 per cent. Its base rate has also gone up 200 bps since it was first introduced in July 2010. The base rate is currently 9.5 per cent.
ICICI Bank, the largest private sector lender, raised its prime lending rate and base rate by 200 bps each. The bank’s prime lending rate is currently 18.25 per cent, higher than its 2008 peak of 17.25 per cent. Its base rate is 9.5 per cent.
“In our view, arguments that real repo rates are still negative in India overlook this important fact (of higher transmission),” Nomura economists said. According to them, the repo rate need not touch its past peak to have the desired impact on the banking system.