RBI rate hike expected to lift margins for banks with benchmark-linked loans

The Reserve Bank of India's six-member Monetary Policy Committee lifted the repo rate by 25 basis points, a move that will be transmitted swiftly to loans linked to external benchmarks. Because banks reprice these loans faster than they adjust deposit rates, lenders with sizable benchmark-linked portfolios stand to gain wider net interest margins. Analysts point to ICICI Bank and Kotak Mahindra Bank as the top beneficiaries, given their high share of such loans and comfortable loan-to-deposit ratios.

Larger private banks like HDFC and Axis may also see gains, though their higher ratios or reliance on wholesale funding could temper the effect. Public-sector banks, despite lower benchmark exposure, could still enjoy modest margin improvement due to lower loan-to-deposit ratios and baseline ROA, even as they face higher credit-loss provisions. Meanwhile, short-term money-market instruments have pushed 90-day CD rates to about 6.75% and one-year CDs to roughly 7.5%, suggesting fresh deposit rates will inch up by 15-20 basis points in the near term.