RBI rate cut may take several months to fully reflect on lending and deposit rates
rate cut by the Reserve Bank of India is expected to take several months to fully reflect on lending and deposit rates, because of a liquidity deficit faced by banks, stiff competition for deposits and the resultant high cost of funds.
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While the rate cut is intended to ease financial conditions, experts suggest the broader effect on the banking system — particularly on loans linked to the marginal cost of funds-based lending rate (MCLR) and deposits — will not be immediate, although repo-linked borrowers have immediately benefited.
«The transmission of Friday's cut to bank lending rates for new loans would take time because the cost of funds for banks is sticky, given the competition for deposits,» said Crisil Ratings senior director Ajit Velonie. «Banks may price this in through a wider spread over the benchmark rate.»
Velonie added that while a rising proportion of floating-rate loans, now accounting for over 40% of the total loan book, is benchmarked to external rates which tend to move in tandem with the RBI's repo rate, repricing on the assets side is likely to occur faster than on the liabilities side. This indicates that loan rates could adjust more swiftly than deposit rates.
The RBI's 25-basis-point cut in the policy repo rate was the first reduction in almost five years, following a series of increases from May 2022 to February 2023. Before the tightening cycle, the central bank had reduced the repo rate by 250 basis points between February 2019 and March 2020. Since
