The cumulative increase of 250 basis points (bps) repo rate by the Reserve Bank of India (RBI) and the reaction of banks in terms of transmission has still not pushed interest cost for borrowers to the pre-pandemic levels, according to a report by Bank of Baroda’s economic research department.

“While borrowers may view this current cycle as imposing an additional burden, this is because abnormal conditions typified by the pandemic had made interest rates come down to the lowest level. Hence, the present level of rates may be viewed as a correction.

“...There is still some room for upward movement in weighted average lending rate, which will keep interest costs of borrowers at the pre-pandemic level,” Dipanwita Mazumdar, economist, BoB.

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The economist observed that when the pandemic started in March 2020, there was a dramatic easing in monetary policy, with repo rate hitting record low of 4 per cent. This was also reflected in the Weighted Average Lending rate (WALR), witnessing more than complete pass through in the same period.

Subsequently, the repo rate has been increased by 250 bps to 6.5 per cent. Both these cycles involved lending rates coming down first and then going up, she said.

BoB’s analysis shows that interest cost on outstanding loans as of February 2020 (under certain assumptions) got a benefit of ₹61,000 crore in FY21 and a further ₹53,000 crore in FY22 relative to FY21.

In FY20, based on the WALR, the interest outgo was ₹10.16-lakh crore (applying the the then outstanding WALR of 10.05 per cent) on a sum of ₹101.05-lakh crore (outstanding loans).

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“In FY21 the cost came down to ₹9.55-lakh crore and declined further to ₹9.02-lakh crore in FY22. Compared with FY20, the cost was lower by ₹61,000 crore and ₹1.14-lakh crore, respectively. If these two years are combined, the savings in interest costs for borrowers amounted to ₹1.75-lakh crore,” said Mazumdar.

Rise in interest cost

In FY23, as interest costs rose, total interest outgo was ₹9.35-lakh crore, which though higher than that in FY22, is much lower than the FY20 cost. Therefore, as the RBI corrected the repo rate towards normal, borrowers were still not worse off compared to pre-pandemic times, opined the Economist.

She assessed that in FY24, based on assumption of unchanged WALR, the interest cost will go up to ₹9.91-lakh crore, which is again lower than FY20 level by ₹25,000 crore.

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