These two banks raise lending rates days after RBI hints at incomplete transmission of repo rate hike

Major banks such as ICICI Bank and Bank of India have recently announced adjustments to their Marginal Cost of Funds Based Lending Rates (MCLR) across various loan maturities, a change effective from November 1, 2023. This decision comes at a time when the Reserve Bank of India (RBI) continues to maintain its cautious approach, keeping the repo rate unchanged for the fourth consecutive time.

ICICI Bank has implemented a 5 basis point increase in its MCLR across all tenures. According to the information available on ICICI Bank's website, the overnight and one-month MCLR rates now stand at 8.50%, while the three-month and six-month MCLRs are pegged at 8.55% and 8.90%, respectively. The one-year MCLR has been elevated to 9%.

Bank of India has followed suit by raising its lending rates by up to 5 basis points on select tenures.

As per Bank of India's website, the overnight MCLR rate now stands at 7.95%, the one-month MCLR has been revised to 8.15%, and the three-month and six-month MCLRs have been elevated to 8.35% and 8.55%, respectively. The one-year MCLR now rests at 8.75%, with the three-year MCLR at 8.95%.

This shift in lending rates is of significant note, considering the RBI's decision to adopt a vigilant stance on inflation, resulting in the steady maintenance of the repo rate. This approach follows a period of active rate hikes, totalling 250 basis points, undertaken by the RBI until a pause in April 2023.

Abhishek Upadhyay, Senior Economist at ICICI Securities PD, told CNBC-TV18 in an interaction that liquidity constraints may continue to tighten, leading to upward pressure on the cost of capital as the effects of monetary policy percolate through the economy. He said, "Liquidity will continue to tighten and rates will stay here. So it is possible there would be some tightening and as monetary policy transmission takes place, there would be some tightening in the cost of capital."

Samiran Chakraborty, Chief Economist for India at Citi, concurred with this perspective, emphasising that while policy rates may appear to have peaked, the process of transmission through the financial system remains incomplete. He said, "I will agree with that perception; although policy rates might have peaked, the transmission is still incomplete."

Shaktikanta Das, RBI Governor, in his last policy address, also emphasised that while the repo rates have been raised by 250 basis points, this increase has not been fully transmitted to bank lending and deposit rates.

What this means for borrowers is that there is still room for a potential hike in lending rates. During the period when the RBI increased the repo rate, banks gradually followed suit by raising their lending interest rates, although there was some delay in transmission.

For perspective, when the repo rate increases, lending interest rates follow suit, and when the repo rate decreases, lending interest rates decline as well.

In another conversation, Nikhil Kamath, Co-Founder of Zerodha, voiced a word of caution regarding India's consumption narrative, particularly in the face of global challenges. Speaking during a panel discussion following a high-level CNBC-TV18 India Business Leadership Awards (IBLA) 2023 jury meeting, Kamath acknowledged India's relatively stable position in comparison to other countries and offered insights into the evolving Indian market.

He underscored the critical role of interest rates in economic performance. While the United States has witnessed a substantial increase in interest rates, India, too, has experienced rate hikes, albeit to a lesser extent. Kamath's observation was that although these interest rate increases may not have had a significant impact on consumption as yet, a sustained higher cost of capital is likely to trigger a slowdown in consumption across various sectors, with real estate poised to be among the first to feel the impact.