Banks may hike MCLR by 150 bps in FY24 amid tight liquidity: Report

Commercial banks are likely to increase the marginal cost of funds based lending rate (MCLR) by 100-150 basis points (bp) in the next financial year (FY24) amid a rise in the cost of money and tight liquidity. The transmission of monetary policy in the banking system could intensify in FY24, according to India Ratings and Research (Ind-Ra).

Responding to the repo rate rising since May 2022, banks have raised median MCLR (of one-year duration) by 120 basis points between May 2022-February 2023, Reserve Bank of India (RBI) data showed. The RBI has hiked policy repo rate by 250 basis points in stages to 6.5 per cent in February 2023.

MCLR-linked loans are mostly given to corporate and business establishments. These loans had 46.5 per cent share in outstanding floating rate rupee loans as of September 2022, according to RBI data.

Ind-Ra said the drawdown by banks from reverse repo in FY23 was to the tune of Rs five trillion. This has enabled banks to address a surge in the gap between incremental credit and deposit, and this will not be available in FY24. Therefore, MCLR will show a significant rise.