The first meeting of the monetary policy committee (MPC) of the Reserve Bank of India in the new fiscal began on Wednesday with little expectations of any change in interest rates.

Analysts, however, expect MPC to provide greater clarity on the weighted average lending rate (WALR) of banks in its monetary policy report amid declining spreads vis-a-vis deposit rates. The weighted average lending rate (WALR) on fresh rupee loans of scheduled commercial banks fell 7 basis points sequentially to 9.36 per cent in February 2024, while the deposit rate (fresh) of SCBs increased 1 bps to 6.44 per cent in February.

The outcome of the three day meeting will be known on Friday. The RBI had raised interest rates between May 2022 and February 2023 by 250 basis points. It has been in a pause mode since April 2023.

During the tightening cycle, WALR on fresh rupee loans rose 181 basis points while that on outstanding loans rose 113 basis points.According to the RBI, during the same period, the weighted average domestic term deposit rates (WADTDR) on fresh deposits and outstanding deposits rose 246 basis points (bps) and 180 bps, respectively.

A note from CareEdge Ratings said that in February 2024, the spread or the difference in commercial banks between the weighted average lending rate (WALR – lending rate) and the WADTDR (the net interest rate spread) stood at 2.92 per cent and 2.95 per cent for fresh and outstanding rates, respectively.

While the spreads of PSU banks touched a new 10-year low of 2.31 per cent, private sector lenders continued to maintain a higher spread as compared to the PSU banks.

10-year paper

The benchmark 10-year yield was trading at 7.10 per cent on Wednesday. Yields are expected to soften later in this year when the India government bonds gets included in the JP Morgan Emerging Market index.

Some expect it to fall even to 6.50 per cent over the next six months, reducing the spread with the repo rate to zero. Others feel the yield could dip to 6.75 per cent.