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Introduction:

In the financial landscape of October 2023, a noticeable discrepancy has emerged between lending rates and deposit rates, shedding light on the dynamics within the banking sector. While lending rates experienced a substantial uptick of 12 basis points (bps), deposit rates, in contrast, surged to a more modest 6 bps.

This divergence prompts a closer examination of the Weighted Average Lending Rate (WALR) on fresh rupee loans and its implications for both consumers and financial institutions.

Lending Rates Soar:

The Weighted Average Lending Rate (WALR) on fresh rupee loans offered by commercial banks recorded a notable increase from 9.38% in the preceding month to 9.5% in October 2023. This surge of 12 bps indicates a significant adjustment in the cost of borrowing for consumers. The reasons behind this escalation are multifaceted and warrant a comprehensive exploration.

1. Policy Rate Influence: The overarching influence of policy rates cannot be overlooked. The benchmark policy rates, driven by the central bank, have experienced a continuous upward trajectory since May 2022, cumulatively rising by 250 basis points. This upward pressure on policy rates has naturally translated into higher lending rates, reflecting the broader economic environment.
2. Inflationary Pressures: Inflationary pressures may also contribute to the spike in lending rates. As inflation rates fluctuate, banks often adjust their lending rates to maintain a balance between profitability and risk management. The recent increase in lending rates might be a response to inflationary concerns, signaling a proactive approach by banks to safeguard their margins.

Deposit Rates Lag:

Contrary to the pronounced surge in lending rates, deposit rates witnessed a comparatively modest increase of 6 basis points. This differential movement between lending and deposit rates raises questions about the transmission mechanism within the banking sector.

1. Transmission Challenges: The delayed and asymmetric transmission of policy rates by banks has been a recurring challenge. While the central bank initiated a series of rate hikes from May 2022 onwards, the full impact of these increases has not been uniformly reflected in deposit rates.
2. This phenomenon suggests a lag in the transmission mechanism, potentially attributed to various factors, including risk aversion and liquidity considerations.
3. Competitive Landscape: The competitive dynamics among banks also play a role in the observed disparity. Banks may be hesitant to pass on the full impact of policy rate increases to depositors, as it could lead to a loss of market share. Striking a balance between attracting deposits and managing lending costs becomes a delicate task, further contributing to the nuanced movements in deposit rates.

Impact on Consumers and Businesses:

The divergence in lending and deposit rates carries implications for both consumers and businesses navigating the financial landscape. Higher lending rates imply increased costs for borrowers, affecting personal loans, mortgages, and business financing.

On the flip side, the relatively slower pace of deposit rate increases may impact savers and fixed-income investors, influencing their returns on deposits and other interest-sensitive investments.

1. Borrowing Costs: Consumers seeking loans in October 2023 are faced with elevated borrowing costs due to the surge in lending rates. This can impact various sectors, including real estate, where mortgage rates play a pivotal role. The increased cost of borrowing may dampen demand in these sectors, posing challenges to economic growth.
2. Investment and Saving Behavior: The discrepancy in deposit rates may influence the saving and investment behavior of individuals. With deposit rates lagging behind lending rates, the real returns for savers may be diminished. This could potentially drive a shift in investment preferences, with individuals exploring alternative avenues for better returns.

Similarly, the WALR on outstanding rupee loans surged to 9.84% from 9.83% in September 2023. The one-year median Marginal Cost of Fund-based Lending Rate (MCLR) continued to retain its position at 8.7% in November 2023, as per the RBI.

Weighted Average Domestic Term Deposit Rate (WADTDR):

In October 2023, the Weighted Average Domestic Term Deposit Rate (WADTDR) for outstanding rupee term deposits increased to 6.75% from 6.69% in September. This rise continued for fresh rupee term deposits, reaching 6.31% in October compared to 6.32% in September.

This shift is influenced by the benchmark policy rates, which have surged by 250 bps since May 2022. This upward trajectory, initiated by the central bank, has not been entirely mirrored in deposit or lending rates by banks.

Interestingly, public sector banks have shown relatively higher transmission compared to private sector banks since May 2022. However, the overall rate of transmission remains only half of the rate at which the central bank increased the policy rates.

This discrepancy raises questions about the extent to which financial institutions are aligning their rates with the central bank’s directives.

Conclusion:

The contrasting movements in lending and deposit rates during October 2023 underscore the intricate interplay of economic factors, policy decisions, and competitive dynamics within the banking sector.

The surge in lending rates, outpacing deposit rate increases, reflects a complex landscape where financial institutions navigate the delicate balance between risk management, profitability, and customer acquisition.

As consumers and businesses adapt to these changes, a comprehensive understanding of the underlying drivers is crucial for informed decision-making in the evolving financial environment.