RLLR is the rate at which banks lend to customers whose loans are directly linked to the repo rate, while the marginal cost of funds based lending rate (MCLR) is the minimum interest rate that a bank can offer on loans, determined by factors such as the bank’s cost of funds, operating expenses, and required margins, and typically responds more slowly to policy rate changes than repo-linked rates.
While the move is favourable for existing borrowers, it has implications for depositors as banks are expected to cut pricing of fixed deposits and other term instruments, in line with falling lending rates and increased liquidity. Motilal Oswal estimates 30-70 bps in fixed deposit returns across tenures sooner than later.
While repo-linked loans respond instantly to monetary policy changes, deposit rates tend to adjust more slowly due to regulatory norms and competitive market pressures. As a result, lenders may face margin pressure, the firm noted in its report, over the next two quarters until deposit repricing aligns with the new rate environment.
The 100-bps phased reduction in the CRR will inject Rs 2.5 trillion into the banking system, with which they can make incremental lending of 10 times more—or worth Rs 25 trillion. Crisil sees the NIM compression which was seen at 10-20 bps earlier due to the past two repo reduction of 25 bps each in February and April, now coming down to 5-15 bps only.
