As SBI hikes loan rates, shift in interest rate cycle gathers steam

State Bank of India has announced that it has lifted the marginal cost of lending rate (MCLR) on loans by ten basis points (bps). The tenor-wise MCLR interest rates are effective from 15th April 2022.

According to

’s website, the overnight, one-month, three-month, and six-month MCLR rates have all been raised by 10 basis points to 6.75 per cent, 6.75 per cent, 6.75 per cent, and 7.05 per cent, respectively.



Similarly, MCLR for tenor of one year stands at 7.10 per cent, two year at 7.30 per cent and three years at 7.40 per cent.

SBI’s move comes on the back of a similar step from another large state-owned lender, Bank of Baroda, which last week announced a 0.05 per cent rise in marginal cost of funds-based lending interest rates on loans, effective April 12, 2022.

Given the large reach of public sector lenders such as SBI and Bank of Baroda, it is likely that other lenders will also follow suit, hence making home, automobile and other loans dearer.

In April, 2016, the MCLR replaced the Base Rate as the reference rate for scheduled commercial banks to price loan rates.

The computation of marginal cost of funds is affected by changes in benchmark policy rates such as the repo rate.

While the RBI’s Monetary Policy Committee kept the repo rate unchanged at its policy statement on April 8, the rate-setting committee set the stage for a tighter monetary policy by saying that it was focussing on withdrawal of accommodation.

With inflation at a 17-month high of 6.95 per cent in March, analysts expect the repo rate to be hiked in June.

Moreover, the RBI’s decision to narrow the corridor of interest rates by implementing the Standing Deposit Facility at a higher interest rate than the previous floor of the corridor effectively represents a hike in the floor rate.

The SDF, which has replaced the reverse repo rate as the lower bound of the interest rate corridor, has been introduced at a rate of 3.75 per cent as against the reverse repo rate of 3.35 per cent.

Given the persistence of a huge surplus of liquidity in the banking system, it is the lower band of the corridor – the facility at which the RBI absorbs excess liquidity-rather than the repo rate – the rate at which the RBI lends to banks-which determines the effective rate.

The anticipation of the repo rate rising in coming months means that the increased cost of funds for banks would naturally be passed on to consumers, analysts said.

“On MCLR, banks will have flexibility to calibrate the pricing and that calibration will depend on various factors including the deposit rates and the corporate bond yields. The G-sec rate or the risk-free rate has gone up by almost 100 basis points in the last six months,” ICRA, Vice-President and Co-Group Head Anil Gupta said.

“…Credit spreads which are at a multi-year low because of excess liquidity, will also rise. This shall give enough headroom for banks to hike MCLRs while remaining competitive vis-a-vis debt capital markets. Overall, because deposit rates are going to go up, the MCLRs of the banks shall increase.”

In February, SBI had increased interest rates on fixed deposits (FDs) for terms longer than two years by 10-15 basis points. Accordingly, the interest rate on 2-year to 3-year FDs has been raised by 10 basis points to 5.20 percent. The revised rates apply to FDs with value of less than Rs 2 crore.

Last week, India’s largest private bank, HDFC Bank raise interest rates on selected fixed deposit tenors of less than Rs 2 crore. The new interest rates came into effect on April 6, 2022.

HDFC Bank has increased its one-year FD interest rate by 10 basis points to 5.10 percent from 5 percent, according to the bank’s website. Its one-year one-day to two-year FD interest rate has also been increased by 10 basis points to 5.10 per cent from 5 per cent.