Lending rates firming up

by Janaki Samant

Yields and interest rates had started to rise gradually even before the RBI announced an effective hardening of its stance towards interest rates by introducing the Standing Deposit Facility (SDF). At 3.75 per cent, the SDF has become the effective floor for the RBI’s liquidity adjustment facility. The SDF is 40 basis points higher than the reverse repo that stands unchanged at 3.35 per cent.

State Bank of India (SBI), the largest public sector lender in the country, hiked its marginal cost of funds based lending rate (MCLR) by 10 basis points on all types of borrowings. The announcement made on 18 April 2022, is applicable for homes loans, vehicle loans and corporate loans, across all tenures. Almost 50 per cent of the bank’s loans are linked to MCLR. Axis Bank, Kotak Mahindra Bank and Bank of Baroda also raised MCLR rates. Around 53 per cent of all floating rate linked outstanding loans of scheduled commercial banks (SCBs) are linked to MCLR.

Private sector banks such as HDFC Bank, Axis Bank, Kotak Mahindra Bank, State Bank of India, Bank of Baroda and ICICI Bank have raised deposits rates since March 2022. So, the hike in lending rates is not completely unexpected.

NBFCs have also started going in for raising deposit rates. Bajaj Finance raised fixed deposit rates by up to 60 basis points on deposits of various tenors on 25 April. Other NBFCs are also likely to follow.

Overnight borrowing rates have also moved up in the recent fortnight. From 3.25 per cent on 4 April 2022, overnight call money rate moved up to 3.57 per cent by 25 April.

Yields on government security with residual maturity of 10 years were rising since the RBI came out with its first monetary policy announcement for 2022-23, on 8 April. From 6.91 per cent on 7 April, 10-year gsec yields shot up to 7.02 per cent on 8 April and further to 7.23 per cent on 13 April. It has eased subsequently to 7.13 per cent on 20 April and further to 7.09 per cent on 25 April.

The volatility in the gsec yields even as interest rates are generally rising can be explained by short-term factors at play. Traders covered short positions and large corporates reportedly bought into government bonds from the secondary market which led to the cooling down of yields. And, increased demand for gsecs in the absence of adequate supply of state development loans (SDLs) is also reported to be the reason behind rising prices leading to the fall in yield.

Further, the RBI also did not appear to be in favour of letting yields move up. As per the auction results released on 13 April, of the Rs.130 billion that was to be raised under 10-year gsec, almost 12 per cent devolved on primary dealers, as the market wanted a lower price.

The fall in gsec yields is likely to be a temporary phenomenon. More than half of the central government’s borrowing programme of Rs.8.45 trillion is slated for the first half of 2022-23. Of this, Rs.3.9 trillion is planned to be borrowed in the first quarter. As stated in its first monetary policy statement for 2022-23, the RBI would start reducing liquidity in the system, though it would be a gradual process. A reduction in liquidity coinciding with the government’s large market borrowing programme implies that gsec yields should head north.

The Russian invasion of Ukraine, which is now going on for two months, shows no signs of letting up. The World Bank and the International Monetary Fund (IMF) have cut world GDP growth rate by 70-80 basis points. IMF’s April 2022 issue of the World Economic Outlook (WEO) has projected world commodity prices to increase by 11.4 per cent during 2022 over and above the 26.8 per cent rise in the preceding year. In the January 2022 update, commodity prices were projected to rise by a modest 3.1 per cent. In its latest update, IMF also expects the conflict to impact food prices well into 2023.

Economic sanctions imposed on Russia and the extent of destruction in Ukraine imply that the supply shortages in wheat, corn, fertilisers, metals and natural gas are unlikely to get resolved any time soon.

Though RBI kept policy repo rate unchanged in its April monetary policy announcement, it has now placed emphasis on maintaining inflation within the policy band, unlike in the previous year when the primary focus was to sustain growth. As inflationary pressures continue to build up because of the Russia-Ukraine war and the consequent shortages and supply chain disruptions, the RBI is expected to act to rein in the effects of these on inflation in India.

A hike in policy rates can lead to a further firming up of lending rates across the banking sector. This is because, besides MCLR, lending rates are linked to external benchmarks. From 1 October 2019, new floating rate loans to micro & small enterprises and retail loans have to be linked to an external benchmark such as policy repo rate, treasury bill rate or any other rate published by the Financial Benchmarks India Private Ltd (FBIL), as per the directions issued by the Reserve Bank of India (RBI). The directive was later extended to medium enterprises from 1 April 2020. Banks are also free to offer this rate to other types of borrowers. This provision will aid in improving the transmission hikes in policy rates. What will be transmitted now will be higher interest rates.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
7.3 +0.4
Consumer Sentiments Index
Base September-December 2015
69.7 -0.3
Consumer Expectations Index
Base September-December 2015
69.4 -0.4
Current Economic Conditions Index
Base September-December 2015
70.1 0.0
Quarterly CapEx Aggregates
(Rs.trillion) Jun 21 Sep 21 Dec 21 Mar 22
New projects 2.89 3.14 3.47 4.92
Completed projects 0.73 1.28 2.76 1.05
Stalled projects 0.33 0.28 0.06 0.29
Revived projects 1.14 0.39 2.06 0.28
Implementation stalled projects 0.64 0.25 0.65 0.07
Updated on: 18 May 2022 8:28PM
Quarterly Financials of Listed Companies
(% change) Jun 21 Sep 21 Dec 21 Mar 22
All listed Companies
 Income 42.2 27.5 23.5 21.8
 Expenses 41.9 26.7 21.7 20.0
 Net profit 139.6 55.1 31.9 38.4
 PAT margin (%) 9.0 9.6 9.0 10.3
 Count of Cos. 4,558 4,678 4,690 1,063
Non-financial Companies
 Income 61.0 35.7 29.3 29.1
 Expenses 62.6 36.0 29.1 29.7
 Net profit 192.7 59.7 18.4 18.1
 PAT margin (%) 8.4 8.8 7.5 9.1
 Net fixed assets 4.9 -0.8
 Current assets 10.8 18.4
 Current liabilities 0.8 10.4
 Borrowings 12.1 7.9
 Reserves & surplus 12.4 10.0
 Count of Cos. 3,332 3,383 3,402 760
Numbers are net of P&E
Updated on: 18 May 2022 8:28PM
Annual Financials of All Companies
(% change) FY20 FY21 FY22
All Companies
 Income 0.5 -0.9 16.1
 Expenses 0.3 -3.3 16.7
 Net profit -4.9 72.5 24.3
 PAT margin (%) 2.0 4.5 12.3
 Assets 8.9 9.6 3.3
 Net worth 4.6 11.5 5.2
 RONW (%) 3.4 7.0 12.4
 Count of Cos. 32,202 29,546 46
Non-financial Companies
 Income -1.3 -2.0 16.2
 Expenses -1.0 -4.1 17.4
 Net profit -20.8 63.1 20.8
 PAT margin (%) 2.2 4.2 11.1
 Net fixed assets 11.2 1.3 8.5
 Net worth 2.2 10.4 8.3
 RONW (%) 4.7 8.0 15.8
 Debt / Equity (times) 1.2 1.0 0.1
 Interest cover (times) 1.9 2.5 26.6
 Net working capital cycle (days) 81 84 38
 Count of Cos. 25,551 23,301 36
Numbers are net of P&E
Updated on: 12 May 2022 7:22AM