In a move likely to impact borrowers and savers alike, banks and non-banking financial companies (NBFCs) have started raising their lending and deposit interest rates. This comes after the Reserve Bank of India (RBI), India’s central bank, has been urging them to pass on the benefits of its recent policy changes.
What’s Happening?
The RBI has been increasing its key interest rate, known as the repo rate, in an effort to control inflation. When the repo rate goes up, it becomes more expensive for banks to borrow money from the RBI. Ideally, banks should then pass on this increased cost by raising their own lending rates (interest rates charged on loans) and deposit rates (interest rates offered on savings accounts and fixed deposits).
The Transmission Gap:
However, in the past, there hasn’t always been a complete “transmission” of the RBI’s rate changes. Banks might be hesitant to raise lending rates as they compete for customers, and deposit rates might not rise as quickly as lending rates. This can leave borrowers facing higher costs without a corresponding benefit for savers.
Closing the Gap:
The RBI has been pushing banks to improve the transmission of its monetary policy. This recent hike in lending and deposit rates by banks and NBFCs suggests some progress is being made.
What This Means for Borrowers:
For people or businesses looking to take out a loan, such as a home loan or car loan, these rising interest rates mean borrowing will become more expensive. This could potentially lead to people delaying loan applications or opting for smaller loans.
What This Means for Savers:
On the flip side, savers might see some benefit from the rising deposit rates. This could make saving accounts and fixed deposits a more attractive option for people looking to park their money and earn some interest.
Not Everyone Wins:
It’s important to note that the impact of rising interest rates will vary depending on your individual circumstances. Borrowers who are already struggling with debt repayments might find it even more challenging. Conversely, people who rely heavily on their savings for income might benefit from the higher deposit rates.
Looking Ahead:
Whether banks and NBFCs continue to raise their rates in line with the RBI’s policy changes remains to be seen. It will depend on a number of factors, including inflation and competition in the financial sector. However, this recent development suggests that the gap between the RBI’s policy rate and lending/deposit rates might be narrowing.
