Banking News

Monetary Policy: Sharp rise in MCLR to intensify policy transmission next fiscal

The transmission of monetary policy in the banking system could intensify in the new fiscal year, driven by the sharp rise in banks’ marginal cost of funding. Domestic rating company India Ratings and Research (Ind-Ra) expects bank marginal cost of funds-based lending rate (MCLR) to increase by 100-150 basis points in FY24.

While the drawdown from the reverse repo in FY23 to the tune of `5 lakh crore has enabled banks to address a surge in the gap between incremental credit and deposit, this will not be available in FY24, the rating agency said. “Given the large part of the incremental credit disbursement has been supported by the drawdown of cash flow with the RBI in lieu of reverse repo in FY23, the impact of the marginal cost of funding has so far been limited,” the agency said in a report. “We believe incremental funding by banks in FY24 would have to be done by way of fresh deposits, therefore the marginal cost of funding will go up significantly.”

Overall, deposit rates in the banking system have shot up by 150 to 200 basis points in the last year, which has resulted in a 75 basis points increase in aggregate deposits in the system.

Moreover, a tepid balance of payments (BoP) surplus of around `60,000 crore would not bring any reasonable improvement in the aggregate deposit, the rating company said. It expects that even if the policy rate remains stable for FY24, rates in the banking system will continue to face upward pressure.

System level liquidity will also tighten further in the coming two to three weeks of March 2023, owing to multiple factors such as advance tax payment, GST payment and TLTRO maturity. Moreover, with the onset of the financial year ending, the activity in the banking system is expected to accelerate, especially on account of credit offtake.

Ind-Ra also said that the upcoming period of tight liquidity could prove to be onerous for entities with a weak liquidity profile. Overall, the agency does not expect a broad-based weakness in the corporate credit profile due to the prevailing monetary conditions. However, sustained pressure on operating margins could increase refinancing risks for weak entities.

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