Banks, NBFCs Raise Lending & Deposit Rates Amid RBI's Push For Monetary Transmission

Several banks and non-banking financial companies (NBFCs) have recently raised their lending and deposit rates in response to the central bank's call for enhanced monetary policy transmission, according to an analysis from a media house.

For instance, Bank of Baroda increased its lending rates by 5 basis points across certain periods on 10 April. HDFC Bank also raised its repo-linked home loan interest rates by 10-15 basis points in March 2024, now ranging between 9.05 per cent to 9.8 per cent.

Similarly, some NBFCs have adjusted their interest rates on fixed deposits (FDs). Bajaj Finance raised its rates by 60 bps on most tenures on 9 April, while Shriram Finance increased FD rates by 0.05 to 0.20 bps.

Experts suggest that lenders are responding to the RBI's push for rate transmission. RBI Deputy Governor J Swaminathan noted that transmission is occurring gradually and will continue over time.

Vijay Singh Gaur, Lead Analyst at CareEdge, commented that lenders are gradually raising rates, indicating that rate transmission will take place progressively.

The call for rate transmission stems from the RBI's concern that the transmission of policy rate hikes to banks' rates has been incomplete. RBI Governor Shaktikanta Das highlighted this issue in the October 2023 MPC meeting, emphasizing the importance of effective rate transmission for inflation management.

In the latest MPC meeting on 5 April, RBI Deputy Governor Michael Patra acknowledged that some rate transmission is happening, but stressed the need for more significant mobilisation of deposits at higher rates to facilitate further transmission.

Effective rate transmission is essential for the central bank's efforts to manage inflation and ensure that actions to control or boost demand are effective.