Lenders raise lending and deposit rates

Major lenders raised interest rates on loans and deposits on a day when the Reserve Bank of India (RBI) made the fourth consecutive hike in repo rates.

The Housing Development Finance Corporation raised the prime rate for housing loans by 50 basis points (bps) on Friday, matching the September repo hike, effective Oct. 1. ICICI Bank raised retail term deposit rates by up to 50bps for a certain bucket maturity, effective from Friday. A one-year term deposit of up to Rs 2 crore with the private bank will now yield 5.7% per annum, down from 5.5% previously. Similar FDs with State Bank of India (SBI) and HDFC Bank are currently yielding 5.45% and 5.5%, respectively.

Also read: Rate hike to have limited impact on home sales: Developers

RBI Governor Shaktikanta Das said at Friday’s post-policy press conference that he expects banks to raise deposit rates in response to the demands of credit growth. While the transmission of rate hikes in the current cycle of monetary tightening has been almost immediate due to the pricing of variable rate loans tied to external benchmarks, deposit rates have been relatively slower to move.

The government on Thursday raised the rates for some small savings plans for October-December after keeping them unchanged for nine consecutive quarters. Das mentioned rate hikes as one factor that could prompt banks to pay more to depositors.

“Credit is picking up, so obviously the banks need more resources for which they necessarily have to increase their deposit rates. Repo rates were raised by 190 basis points after the start of this cycle of rising interest rates. So I think all of these factors taken together, banks will increase deposit rates in the future,” he said.

Prakash Agarwal, director and head of financial institutions, India Ratings and Research, said deposit rates are expected to rise faster in the remainder of FY23 than in the first half amid tighter liquidity conditions. However, the rises are likely to be lagged and lower than the repo.

Borrowers could face a challenge as rates steadily rise. “…loan growth, especially long-term ones such as mortgages which have seen strong growth, may face headwinds as the increase in installments becomes significant,” Agarwal observed.

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