Linking lending and repo rates may eat into bank's profitability

Current situation may not allow banks to significantly tinker with deposit rates making it tough to fully pass on the fall in repo rate

Stocks of public sector banks (PSBs) were buzzing in Monday’s trade — up between nearly 2 per cent and 8 per cent, thanks to the near-term recapitalisation measure reiterated last Friday by the government.

While the latest government measure should support growth in FY20, the question remains whether growth will come at the cost of profitability if PBSs link their lending rate with the Reserve Bank of India’s (RBI’s) repo rate. Picking the trend started by State Bank of India (SBI), which recently introduced repo rate-linked loans, the finance minister on Friday nudged other PSBs to adopt this practice. Repo rate