Indian Banks Hike Lending Rates by Up to 25 Basis Points to Protect Margins Amid NRI Deposit Surge

Major Indian commercial banks have initiated a round of lending rate hikes, lifting benchmark borrowing costs by up to 25 basis points to shield their net interest margins (NIMs) from escalating funding and carrying costs. The upward revisions follow a massive mobilisation of non-resident Indian (NRI) funds under special foreign currency deposit mechanisms, alongside monetary policy tightening by the Reserve Bank of India (RBI).

At least five leading public and private sector lenders—including State Bank of India (SBI), HDFC Bank, Punjab National Bank (PNB), Bank of India, and Indian Bank—have recently increased their Marginal Cost of Funds-based Lending Rates (MCLR) across multiple tenures.

Carrying Costs and the FCNR(B) Influx

The immediate catalyst behind the hikes is the rising cost of funds on bank balance sheets. Between June and late August, Indian banks mobilised substantial foreign capital via Foreign Currency Non-Resident Bank [FCNR(B)] deposits under a special central bank window paired with dollar swap arrangements. System-wide mobilisations through FCNR(B) and overseas credit routes brought tens of billions of dollars onto bank balance sheets, with total foreign currency deposit inflows reaching roughly $133 billion.

However, these deposits carry elevated costs compared to conventional domestic savings, frequently costing lenders between 6.5% and 7.0%. If banks fail to deploy this high-cost liquidity into sufficiently remunerative assets, their margins face compression.

Pramod Dwivedi, Executive Director at Bank of India, noted that lenders adjusted their MCLRs following the central bank's policy signals. In rupee terms, Bank of India mobilised ₹24,000 crore, using the funds to retire higher-cost bulk deposits contracted at 7% to 8% and adjusting lending rates to defend its net interest margin.

Monetary Tightening and Inflation Pressures

The revisions in lending benchmarks are aligned with the RBI's shift in policy stance. In October, the central bank’s Monetary Policy Committee lifted the key policy repo rate by 25 basis points to 5.50%, initiating a tightening move to rein in inflation after headline retail inflation climbed above the central bank’s 6% upper tolerance band, driven largely by food prices.

Following the central bank's cue, several banks raised term deposit rates by 10 to 50 basis points on select retail tenures to support domestic liability growth, creating compounding upward pressure on the marginal cost of funds.

Key Banks Revising Rates:

• State Bank of India (SBI): Raised MCLR by up to 15 basis points across three-month to three-year tenures.
• HDFC Bank: Increased MCLR by 5 to 15 basis points across tenures.
• Punjab National Bank (PNB): Adjusted benchmark lending rates and term deposit rates on select brackets.
• Bank of India & Indian Bank: Increased MCLR rates to reflect higher marginal funding costs and protect margin trajectories.

Implications for Borrowers and Equities

For retail borrowers, the increase in lending rates will result in higher equated monthly instalments (EMIs) across floating-rate home, personal, and automobile loans. Corporate borrowers accessing working capital and term loans pegged to the MCLR will also face higher debt servicing costs.

Analysts observe that while costlier credit could temper systemic loan growth over the coming quarters, the proactive resetting of loan books will enable banks to offset deposit repricing, helping sustain net interest margins into the second half of the financial year.