PSU Banks Hike Repo-Linked Lending Rates by 25 Bps Following RBI Policy Tightening

Major Indian public sector banks have announced an immediate 25 basis point hike in their repo-linked lending rates (RLLR), passing on the full quantum of the Reserve Bank of India’s (RBI) benchmark rate increase to borrowers. The state-owned lenders initiated the revisions right after the RBI’s Monetary Policy Committee (MPC) voted to raise the policy repo rate by 25 basis points to 5.50 percent from 5.25 percent, marking the central bank's first rate increase in nearly four years.

The central bank also shifted its monetary stance from "neutral" to "calibrated tightening," with RBI Governor Sanjay Malhotra indicating that near-term rate cuts are off the table.

Bank-Wise Rate Revisions

State-run lenders moved rapidly to revise their external benchmark lending rates, effective October 8:

• Punjab National Bank (PNB): The country's second-largest state lender revised its Repo Linked Lending Rate from 8.10 percent to 8.35 percent (which includes a business strategy spread of 0.35 percent). PNB confirmed that its Marginal Cost of Funds-based Lending Rate (MCLR) and Base Rate remain unchanged.
• Bank of Baroda (BoB): The lender increased the Baroda Repo Based Lending Rate by 25 basis points from 7.90 percent to 8.15 percent, representing a spread of 2.65 percentage points over the RBI’s repo rate.
• Indian Bank: Chennai-based Indian Bank revised its Repo Linked Benchmark Lending Rate (RBLR) from 7.95 percent to 8.20 percent.
• Bank of India (BoI) and Indian Overseas Bank (IOB): Both public lenders raised their benchmark lending rates from 8.10 percent to 8.35 percent.
• UCO Bank: The lender revised multiple benchmark rates, lifting its three-month Benchmark Lending Rate to 5.30 percent, six-month Treasury Bill Linked Rate (TBLR) to 5.70 percent, and 12-month TBLR to 5.95 percent.

Private lenders also mirrored the trajectory, with Tamilnad Mercantile Bank revising its RLLR from 8.25 percent to 8.50 percent and RBL Bank pricing its repo-linked rate at 8.50 percent.

Impact on Retail Borrowers and Businesses

The immediate upward repricing hits floating-rate loans that fall under the External Benchmark Lending Rate (EBLR) framework. Since October 2019, the RBI has mandated that retail loans—such as home, auto, and personal loans—as well as loans to micro, small, and medium enterprises (MSMEs), be linked to external benchmarks, most commonly the repo rate.

For existing borrowers, this means an automatic increase in loan tenure or an uptick in equated monthly installments (EMIs). Repricing for existing facilities linked to the repo rate typically takes place within a 90-day reset cycle. Prospective homebuyers and retail borrowers will also face higher threshold borrowing rates across most public sector branches.

Implications for Banks and Equity Markets

The immediate pass-through to lending rates creates mixed dynamics for the banking sector:

Lending Margins: External benchmark loans reprice immediately, which tends to temporarily expand net interest margins (NIMs) for banks. However, pass-through to deposit rates is anticipated to lag, particularly as banking liquidity remains supported by non-resident foreign currency deposits, although fresh term deposit yields may eventually firm up as money market rates adjust.

Demand in Sensitive Sectors: The tightening cycle and the RBI's shift to calibrated tightening present headwinds for credit growth in real estate, construction, and consumer durables. Developers face higher project financing costs, while discretionary retail borrowing could see modest dampening if rates remain elevated.

Tags: Punjab National Bank Bank of Baroda Indian Bank Reserve Bank of India Nifty PSU Bank Banking Sector