State Bank of India (SBI), ICICI Bank and Union Bank of India raised their marginal cost of funds-based lending rates (MCLRs) on Friday, days ahead of the Reserve Bank of India’s (RBI) monetary policy review. On Thursday, Punjab National Bank (PNB) had raised MCLRs by 5-10 basis points (bps), with the one-year MCLR rising to 8.4% from 8.3% earlier. The rate hike at SBI was a uniform 10 bps across tenors. The one-year MCLR at the country’s largest lender now stands at 8.25%. Earlier this week, SBI had raised interest rates on fixed deposits by 5-25 bps.
ICICI Bank also raised its one-year MCLR by 10 bps to 8.4% as did Union Bank, where the one-year MCLR now stands at 8.45%. Other large banks, such as HDFC Bank, Bank of Baroda, Axis Bank and Bank of India, are likely to take a call on lending rates later in the month. Last month, Axis Bank had raised MCLRs by 10-15 bps.
All large lenders have raised lending rates since the beginning of 2018 as yields in the money markets hardened in the past few months even as the RBI remained on pause. On Friday, the yield on the benchmark 10-year gilt closed at 7.85%, up from 6.53% at the end of August.
Economists and analysts are now betting on two rate hikes by the Reserve Bank of India (RBI) during FY19. Consumer price index (CPI)-based inflation rose to 4.58% in April from 4.28% in March, giving rise to expectations that the central bank may be unable to meet its inflation target.
In a note dated May 15, Kotak Institutional Equities (KIE) said, “We expect inflation in H1FY19 to marginally overshoot RBI’s CPI inflation range of 4.7-5.1% amid higher food and core inflation before moderating towards 4.5% by end-FY2019.” Banks started raising lending rates in January, with Axis Bank leading the charge that month. In the subsequent months, SBI, HDFC Bank, ICICI Bank and Punjab National Bank hiked rates, in what turned out to be the first series of rate increases since the MCLR framework was put in place.
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