Even while analysts expect the monetary policy committee meeting this week to agree for another pause, with a rate decrease pushed back to December, banks have been selectively hiking deposit and lending rates.
According to SBI chairman Dinesh Khara, markets can no longer rely on the US Federal Reserve to set interest rates. "There is a lot of decoupling going on. It is not true that when the US Federal Reserve lowers interest rates, everyone else follows suit. We saw the Bank of England cut first, followed by Australia. Japan has expanded. All the central banks are not in sync", Khara said.
According to Rajneesh Karnatak, chairman of the Bank of India, the war for resources is likely to last several quarters. "We are passing on the increase in cost of deposits to borrowers in the form of higher MCLR rates and we may increase the spread over the repo rate as well", according to him.
What is skewing the interest rate market is that, although depositors penalize banks for not offering enough savings accounts, major corporations continue to set borrowing rates.
"Corporate still has pricing power - the weighted average lending rate on fresh rupee loans fell by 11 basis points (100bps = 1 percentage point) between January and June 2024, despite the fact that the weighted average domestic term deposit rate rose by 3bps. A classic case of asymmetric transmission", stated an SBI study report. This implies that small firms are facing the brunt of the rate increases.
According to Bank of Baroda chief economist Madan Sabnavis, the earliest rate drop might occur in December 2024. "The RBI's MPC is expected to maintain the repo rate unchanged. Monetary policy is also anticipated to remain unchanged as accommodation is withdrawn. The monetary policy stance was last revised in June. This is because the RBI is unlikely to be satisfied with the recent surge in food inflation," Sabnavis explained.
According to Shreya Sodhani, a regional economist at Barclays, the rate drop would most likely be delayed until 2025. "We continue to expect the opportunity for a rate decrease to open in December 2024, but we see a possibility that the first cut would be postponed until 2025. Recent communication by the RBI has turned increasingly cautious over elevated food inflation, which continues to prevent long-term disinflation in the headline rate", said Sodhani.
