Do note that the Economic Survey has data till November 2022. To arrive at how much hike in the rate has been passed on, we have assumed the rate hike till November 2022.
From January to November 2022, the RBI hiked the repo rate by 1.90%, whereas the weighted FD rate has been hiked by only 0.59%. This shows that only 31% of the 1.90% has been transmitted to the FD investor.
According to the Economic Survey 2023, “Lending and deposit rates of banks increased during FY23 in consonance with the policy repo rate changes. During FY23 (up to December 2022), external benchmark-based lending rate and 1-year median marginal cost of funds-based lending rate (MCLR) increased by 225 bps and 115 bps, respectively. Overall, the weighted average lending rate (WALR) on fresh and outstanding rupee loans rose by 135 bps and 71 bps, respectively, in FY23 (up to November 2022). On the deposit side, the weighted average domestic term deposit rate (WADTDR) on outstanding deposits increased by 59 bps in FY23 (up to November 2022).”
The survey further reveals that an analysis of transmission across bank groups during FY23 (up to November 2022) indicates that the increase in the WALRs on fresh loans was higher in the case of public sector banks, while that of the WADTDR on outstanding deposits and WALR on outstanding loans was higher for private banks.
One can say that private sector banks offered higher interest rates on fixed deposits as compared with public sector banks.
Why Reserve Bank of India hiked repo rate
Due to a rise in inflation in FY 2023, the RBI was forced to hike the key policy rates such as repo rate and the standing deposit facility (SDF) rate. The rate hike came after the central bank had cut the repo rate for almost two years.
During the Covid period, the Monetary Policy Committee (MPC) maintained a status quo on the policy repo rate between May 2020 and February 2022. This was done after the MPC reduced the key policy rate by 1.15% between March 2020 and May 2020.
According to the Economic Survey 2023, “Inflationary pressures dominated the global economic landscape in FY23. The build-up of price pressures occurring in tandem with the economic recovery in FY22 from the pandemic was long viewed as transient. It was expected to abate as supply chains normalised. The debate on said transience was put to rest by the conflict that erupted in Europe in February 2022. It resulted in commodity prices soaring and added significantly to the prevailing inflationary pressures. This development has triggered the current sharp and synchronous monetary tightening cycle.”