Deposit Repricing and Net Interest Margin Dynamics During Monetary Tightening in Indian Banking

This study examines how monetary tightening reaches bank margins through deposit repricing in Indian banking. The central finding is that lending and deposit rates adjust at different speeds. During May 2022 to September 2024, the Policy Repo Rate increased by 250 basis points, fresh term-deposit rates by 251 basis points and fresh rupee lending rates by 186 basis points, while outstanding deposit and loan rates adjusted more slowly. As deposit repricing progressed, banking-sector Net Interest Margin moderated from 3.7 per cent in 2022-23 to 3.3 per cent in 2023-24. The findings indicate that the effect of a rate increase on Net Interest Margin depends on the relative pace of asset and liability repricing and on the extent to which deposit composition moderates funding costs. Current-Account and Savings-Account funding can delay the transmission of higher market rates into average deposit cost, although this cushioning effect can diminish as term deposits reprice. Accordingly, analysis of a tightening cycle should track the Policy Repo Rate, fresh and outstanding lending rates, fresh and outstanding deposit rates, Cost of Deposits and Net Interest Margin as a connected transmission sequence.

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