Banks may hike MCLR by 150 bps in

FY24 amid tight liquidity: Report

RBI has raised policy repo rate by 250 basis points
in stages to 6.5% in February 2023
Commercial banks are likely to increase the marginal cost of funds based
lending rate (MCLR) by 100-150 basis points (bp) in the next financial year
(FY24) amid a rise in the cost of money and tight liquidity. The transmission
of monetary policy in the banking system could intensify in FY24, according
to India Ratings and Research (Ind-Ra).
Responding to the repo rate rising since May 2022, banks have raised
median MCLR (of one-year duration) by 120 basis points between May
2022-February 2023, Reserve Bank of India (RBI) data showed. The RBI has
hiked policy repo rate by 250 basis points in stages to 6.5 per cent in
February 2023.

MCLR-linked loans are mostly given to corporate and business

establishments. These loans had 46.5 per cent share in outstanding floating
rate rupee loans as of September 2022, according to RBI data.
Ind-Ra said the drawdown by banks from reverse repo in FY23 was to the
tune of Rs five trillion. This has enabled banks to address a surge in the gap
between incremental credit and deposit, and this will not be available in
FY24. Therefore, MCLR will show a significant rise.

The agency said a tepid balance of payments (BoP) surplus of around Rs 600
billion would not bring any reasonable improvement in the aggregate
deposit. Even if the policy rate remains stable for FY24, rates in the banking
system will continue to face upward pressure.
The system liquidity may 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 year ending, the
activity in the banking system is expected to accelerate, especially on
account of credit offtake.
The RBI will remain supportive by ensuring the presence of required system
liquidity. However, tools and mechanisms could vary between long-term
repo auction and open market purchase of short-term bonds or T-bills. The
upcoming period of tight liquidity could prove difficult for entities with a
weak liquidity profile, it added.
The incremental funding is happening at higher costs. The impact of
marginal cost of funding has so far been limited as 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. However, the
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.

Deposit rates in the banking system have shot up by 150 to 200bp in the last
one year, which has resulted a 75bp increase in aggregate deposits in the
system, said Ind-Ra.