Deposit rates drop more in easing phase, lending rates rise in tightening

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Following a 25 basis points (bps) cut in the policy repo rate by the Reserve Bank of India (RBI) last week, banks are expected to revise their lending and deposit rates.

 

Data from the previous easing and tightening phases show that during the easing phase (February 2019 to March 2022), when the policy repo rate was reduced by 250 bps, the weighted average domestic term deposit rate (WADTDR) on fresh deposits fell by 259 bps (more than the repo rate). In contrast, during the tightening phase (May 2022 to November 2024), when the policy rate was increased by 250 bps, the WADTDR on fresh deposits rose by 243 bps. This indicates that transmission on deposit rates is higher during the easing phase than in the tightening phase.

 

During the same period, the one-year marginal cost of funds-based lending rate (MCLR) decreased by 155 bps in the easing phase, while it increased by 175 bps in the tightening phase, indicating that transmission in loan rates is greater during the tightening period than in the easing period.

 

Additionally, the weighted average lending rate (WALR) on fresh loans dropped by 232 bps during the easing phase, whereas in the tightening phase, it increased by 189 bps. 

 

RBI data suggest that during the tightening period, the transmission on fresh deposits and loans was higher for state-owned banks than for private sector banks. Following a 250 bps hike in the repo rate, the WALR on fresh rupee loans increased by 182 bps for state-owned banks, compared to 178 bps for private banks. On the deposit front, the WADTDR on fresh deposits rose by 261 bps for state-owned banks, while it increased by 212 bps for private banks.