The Reserve Bank of India’s 25 basis point repo rate hike to 5.5 per cent could provide banks with near-term support to net interest margins as lending rates, particularly on externally benchmarked loans, reprice faster than deposit costs, although the benefit is likely to narrow as deposits mature and are repriced.

Lending rates likely to reprice faster than deposit costs, giving banks early margin support

RBI data shows fresh loan rates at 8.61% in August versus 5.67% on fresh term deposits

Jefferies sees potential for bank margin expansion as rate hikes feed through into loan yields

Deposit repricing and higher funding costs could eventually compress the initial margin benefit

The RBI’s decision to raise the repo rate by 25 basis points to 5.5 per cent is likely to give banks some near term support to net interest margins (NIMs), as lending rates on floating rate loans are expected to reset faster than deposit rates . The initial benefit will come from the timing mismatch between assets and liabilities. While loans linked to an external benchmark are reset relatively quickly following a repo rate change, deposits are repriced largely when existing deposits mature or when banks raise rates on incremental deposits. “Banks might get some early margin support, because lending rates rise faster than deposit rates,” Saurabh Bhalerao, associate director at CareEdge, told ETBFSI. He added that there would be a window during which lending rates would be relatively higher than deposit rates before funding costs catch up. Advt

The RBI’s latest lending and deposit rate data also points to the existing spread between loan and deposit pricing.

Source link