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Charts & Analysis

Chart: Base Rates of Indian Banks Don’t Respond Quickly When RBI Cuts Rates

Since RBI introduced the base rate in 2010, Banks are not allowed to lend below that rate. Take a look at how banks have moved their rates in response to RBI rate hikes and cuts.

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Source: RBI Lending Rates.

The above chart includes all banks, including foreign banks whose lending rates tend to be lower. Looking at just Indian banks, here’s the situation:

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A few quick observations:

  • Everyone pushed rates up immediately as RBI increased the Repo rate.
  • On the way down, though, most banks have dithered, with only tiny decreases in their base rates.
  • Private banks seem to hve responded better than public sector banks (though SBI is a big exception)
  • Lastly, notice that the corridor between 8 and 9.5% is totally empty. In this rate corridor, much of the shorter term lending (less than 1 year) trades in the Commercial Paper market. Good companies even see long term bonds in this range (For example, a Sterlite 2023 bond today traded at 9.15%) So for corporates, it makes a lot more sense to issue CP or bonds than wait for banks to bring down their lending rates. Should this change happen significantly, we’ll see banks react immediately.

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