There might be a collective sigh of relief from India Inc. as top-tier banks put a halt on any increases to the Marginal Cost of Funds Based Lending Rate (MCLR), thus securing their borrowing costs from banks at present rates.
Big names in the banking sector, like the State Bank of India and Bank of Baroda, decided to hold their MCLR steady in May 2023, in line with the Monetary Policy Committee’s (MPC) decision to keep the policy repo rate unchanged in their previous meeting in April and with term deposit rates nearly at their maximum.
Projections for the Next MPC Meeting
The MPC is predicted to continue this trend of maintaining the status quo in their upcoming meeting, which is set to take place from June 6 to 8. This is also influenced by the recent decrease in retail inflation in April 2023 to an 18-month low of 4.70%, down from 5.66% in March.
The decision by major banks to keep the MCLR steady comes at a time when credit to large industries has seen a revival, growing by 3% in FY23 compared to 2% in FY22.
Banking Views on the MCLR
A Manimekhalai, MD and CEO of Union Bank of India, shared in a recent conversation with businessline that, “If we can keep our deposit costs steady, there isn’t a real need for us to raise our MCLR.”
Corporate loan prices from banks refer to the MCLR. This benchmark rate consists of four parts: marginal cost of funds; negative carry due to cash reserve ratio; operating costs; and tenor premium.
Rate Adjustments and Transmissions
Banks have fully transferred the accumulated 250 basis points (bps) hike in the repo rate during the May 2022–March 2023 period to their External Benchmark-Based Lending Rates (EBLRs). This benchmark is used to price floating-rate retail loans and MSME loans.
However, the MCLR, which is the internal benchmark for pricing corporate loans, only saw a rise of 140 bps during the same period.
The Future of Rates
Madan Sabnavis, Chief Economist of Bank of Baroda, shared his perspective, “Considering the MPC’s decision to maintain the status quo, the repo rate component of the MCLR remains unchanged. So, large banks haven’t increased deposit rates across any tenors.”
Drawing on RBI Governor Shaktikanta Das’ recent remarks about the encouraging CPI data for April, Sabnavis believes that this indicates a likely continuation of the repo rate status quo in the next MPC meeting. Hence, there is no pressure for banks to raise deposit and lending rates.
He also added that “Another reason why banks aren’t increasing deposit rates is that the gap between credit growth and deposit growth has lessened. We are in the so-called slack season, so credit uptake will slow down. Therefore, there’s no stress on increasing deposit rates. The net liquidity in the banking system is nearing balance.”
