New Delhi, July 9 || The change in repo rate is the most reliable predictor among key banking metrics like advances, deposits, and Net Interest Income (NII) that affect lending activities, a report said on Wednesday, adding that banks need enhanced assessment of the interest rate impact.
However, it takes 12 to 24 months for the full effects of rate changes to materialise in banking performance as transmission is neither immediate nor uniform, showed a Boston Consulting Group (BCG) study.
"Such policy rates are often increased to cool down an overheated economy, to rein in inflation," said Deep Narayan Mukherjee, Partner and Director, BCG.
"While rates act as enablers, the actual expansion of credit hinges on borrower sentiment and lenders’ risk appetite," Mukherjee added.
According to the study, the repo rate is the most accurate predictor across all metrics, even though rate changes affect all Scheduled Commercial Banks (SCBs).
A 50 bps increase in the repo rate leads to a 1.11 per cent rise in Net Interest Income (NII) across SCBs, with PSBs showing a sharper 1.45 per cent gain, it noted.