Rate transmission uneven despite liquidity comfort
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Mumbai: Banks appear to have largely looked through improving system liquidity and policy rate cuts while reducing the cost of borrowing for those taking loans tied to the lenders' internal benchmarks. Rates have reduced by only 5-15 bps for existing borrowers on loans tied to marginal cost of funds-based lending rate, even as liqudity turned into a surplus, and the central bank cumulatively cut policy rates by half a percentage point since February."I think the market rates will remain dynamic for some time before they settle," Amitabh Chaudhry, MD, Axis Bank , had said during the earnings call. "It was something similar when the rate started going up. You will see something similar when the rates are going down. So, it is pretty much a part of the normal playout of this activity over the next couple of quarters." In response to the cumulative 250 basis point rate increase during the last tightening cycle, between May 2022 and September 2024, the one-year median MCLR rose 170 basis points.The weighted average lending rate on fresh and outstanding rupee loans increased 186 basis points and 116 basis points, respectively, during this period. Last week, several major banks made modest adjustments to their lending rates. HDFC Bank , India's most-valued lender, reduced its one-year MCLR by 15 bps, from 9.30% to 9.15%. Liquidity in system has improved since April. Daily average surplus liquidity stood at ₹1.4 lakh crore in April and ₹1.3 lakh crore as of May 8. March saw an average daily deficit of ₹1.23 lakh crore.The WALR on outstanding rupee loans declined by 10 bps as of March. In case of fresh loans, it has increased reflecting the significant proportion of MCLR-linked loans in it, given the longer reset period, it may undergo adjustments with some lag, experts say."Uneven pace of rate transmission is due to mix of credit portfolios across fixed and floating rate structures, and varied spreads by banks," said Aastha Gudwani, India chief economist at Barclays.
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