Interest rate revision needs to be viewed from depositors’ point of view too: Shaktikanta Das

Interest rate revision is critical not only for borrowers but also for depositors, Reserve Bank of India Governor Shaktikanta Das said here on Saturday. He also said that negative interest rate for a long period is not good for the financial system.

The Governor was answering a question on the impact of successive rate hikes on home loan borrowers and prospective home buyers.

To check inflation, Monetary Policy Committee (MPC) raised policy repo rate six times since May 2022, with a total of 250 basis points (one basis point is one-hundredth of a percentage point). The current repo rate stands at 6.5 per cent.

Since a higher Repo Rate makes banks to pay more for the money they borrow from RBI, the banks in turn raise their interest rates on loans, which in turn raise EMIs (Equated Monthly Instalments).

However, Das pointed that revision in interest rates needs to be seen from depositors’ point of view too.

“When interest rates are rising, there is somebody called depositor, his interest has to be taken into account,” he said. Schedule commercial banks, in recent times, have raised their rates on term deposits. Das also said that deposit rates and lending rates are deregulated and it is left for the banks to decide their rates. “Market competition will decide what should be the rate, both in lending as well as deposit side,” he said.

SBI research report has said that banks have transmitted the hike in repo rate to both deposit and credit rates. With this, around 150 basis points (bps) has been transmitted to deposit rates and this is likely to provide a fillip to deposit growth rates. While on fresh loans, the transmission is only 125 bps, as around 52 per cent of the loans are in MCLR/Base Rate.

As 47.6 per cent of the loans are benchmarked to external benchmarks (EBR), increase in repo rate of 250 bps (including last week’s 25 bps hike) will eventually increase interest cost.

“Our analysis indicates that due to repo rate of 250 bps hike during this cycle, interest cost on incremental loans of retail and MSME consumers will be at around ₹18,000 crore, as all the new loans bench-marked to Repo Rate (mostly). This will likely impact demand, going forward,” the report said.

Das highlighted that revision in policy rate has taken the interest rate into positive territory after a gap.

“We had negative interest rate for last three years and continuation of negative interest rate far too long can create instability in the financial system,” Das said.

Further, MPC is mandated under the law to maintain price stability which is an important component of financial stability. “As a part of price stability requirement, MPC is taking various decisions and interest rate increase is part of that process,” he said.