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Further hike in repo rate to trigger rise in deposit and lending rates, no CRR increase

Repo rate hiked further, MPC focused on containing inflation: MPC unanimously voted to further hike policy repo rate by 50bps to 4.9%. It remains focused on withdrawal of accommodation to ensure inflation is contained within the target while supporting growth. There is a change in the commentary from ‘withdrawal of ultraaccommodative’ stance to ‘withdrawal of accommodative’ and that upside risks to inflation persists, and appear more hawkish. The move reflects reversal of rate action in 2020 and also points towards further rate hikes during the year and get closer towards the pre-pandemic repo rate.

No CRR hike: Post CRR hike of 50bps in May (that would have sucked systemic liquidity to the extent of Rs870bn), systemic liquidity has moderated. There was no further hike in CRR. While normalising the pandemic related extraordinary liquidity accommodation, RBI will ensure adequate liquidity to meet the productive requirements.

Will trigger further increase in deposit and lending rates: Recently, post repo rate hike in May, MCLRs were hiked by 10-30bps by leading banks. Banks have also raised deposit rates across maturity buckets with peak retail TD rates being at 5.75%. Also, wholesale peak TD rates are in the range of 5.25-5.75% for leading private banks. Now with another 50bps repo rate hike, rates will be further revised upwards.

Transmission in EBR regime to be more effective with repo rate hike: With increase in repo rate over FY23, the pace of transmission will be more effective as the proportion of banking sector’s floating rate loans linked to the external benchmarks (EBR) has risen further from 39.2% / 28.6% / 9.3% in Dec’21 / Mar’21 / Mar’20, respectively. Proportion of loans linked to MCLR is down to 53% as of Dec’21 from 77.7% in FY20, and a mere 5% of floating rate loans are linked to the base rate. Transmission through repo rate hike will be relatively more favourable for private banks vis-à-vis PSU banks as proportion of EBR-linked loans for the former has risen to as high as 57% as of Dec’21 (from 43% / 17.5% in Mar’21 / Mar’20) while that for PSU banks was 28% in Dec’21 (vs 20.3% / 4.8% in Mar’21 / Mar’20). More than 60% of PSU banks’ floating rate loans are still linked to MCLR.

Home loan, MSME to see immediate repricing: Amongst product segments, 46% / 69% / 20.4% of retail / MSME / large industries credit, respectively, is linked to EBR and will reprice with repo rate being hiked. For large industries, vehicles and personal/contingency/gold loans, 71% / 60% / 61% are still linked to MCLR and these segments would benefit with banks revising MCLR in due course. Overall, home loan rates have been revised from 6.5%-6.7% to 7.0%-7.1% for leading financiers.

Inflation likely to remain above tolerance level; CPI inflation now projected at 6.7% for FY23: Global geopolitical situation, elevated commodity prices, continuing trade and supply-chain bottleneck, rising pass-through of input costs etc. impart considerable uncertainty to the domestic inflation outlook. Inflation is likely to remain above the upper tolerance level of 6% through the first three quarters of FY23. CPI inflation is now projected at 6.7% (5.7% / 4.5% earlier) for FY23 with Q1FY23 estimated @ 7.5% (6.3% / 4.9%), Q2FY23 @ 7.4% (5%), Q3FY23 @ 6.2% (5.4% / 4%) and Q4FY23 @ 5.8% (5.1% / 4.2%) with risks evenly balanced. To keep inflation expectations anchored and restrain the broadening of price pressures, calibrated monetary policy action is needed. Real GDP growth forecast for FY23 is retained at 7.2% with Q1FY23 estimated @ 16.2%, Q2FY23 @ 6.2%, Q3 @ 4.1% and Q4 @ 4.0% with risks broadly balanced.

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