A basis point is 0.01 percentage point. Repo is the rate at which the RBI gives short-term funds to banks.
While all banks will automatically pass on the entire repo rate increase to customers who had availed of loans linked to external benchmarks, in the case of Marginal Cost of funds-based Lending Rate (MCLR) and fixed rate loans, their asset liability committees are expected to take a call on the quantum of the hike.
“The higher interest rates will get transmitted directly for loans which are linked to external benchmarks such as home loans or SME loans, however MCLRs will be slower to react in terms of quantum of change,” Madan Sabnavis, Chief Economist, .
“The same will hold for deposit holders who will receive higher rates depending on how banks adjust their rates based on their funding requirements. As there is surplus liquidity currently in the system which can go for lending, the immediate response may be slow.”
More than 40 per cent of all outstanding bank loans are linked to the EBLR currently, and 50 per cent is linked to external benchmarks such as the repo or government securities. The remaining are fixed rate loans.
“With EBLR linked loans gaining traction, repo rate increase will curtail inflation through the credit channel as well,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, . “As every 1 bps increase in repo has a combined impact of nearly Rs 305 crore on demand from retail & MSME consumers. With terminal repo rate at 5.75 per cent there will be reduction in demand from consumers to the tune of Rs 45,000 crore.”
On Tuesday, private lender
hiked its lending rate linked to marginal cost by 35 basis points across loan tenors, making loans expensive for existing borrowers. The new marginal cost of funds-based lending rate (MCLR) will now range between 7.5 per cent and 8.05 per cent. The one-year MCLR rate stands at 7.85 per cent.
The bank had earlier raised MCLR by 25 basis points on May 7, 2022. This had come close on the heels of the Reserve Bank of India hiking its benchmark repo rate by 40 bps to 4.40 per cent.
Last week,
corporation raised interest rates on home loans by 5 basis points, effective June 1. Last month, the mortgage lender had raised rates by 30 bps.
Private lender
had increased its MCLR by 30 basis points from June 1. It had also passed on the 40-bps repo rate hike to its customers linked with external benchmark lending rate. Other lenders like , and Bank of India also hiked their MCLR.
