Public sector banks poised to benefit from rate repricing amid RBI hike cycle

Public sector banks are expected to secure a reprieve on net interest margins through faster asset repricing if the RBI embarks on a rate hiking cycle, according to banking sector analysis. The advantage stems from the substantial portion of PSB loan books indexed to repo rates and other floating rate mechanisms, which adjust swiftly to policy changes.

Unlike fixed-rate advances that remain locked at predetermined rates, repo-linked loans allow banks to immediately pass through RBI rate hikes to borrowers. This structural feature enables PSBs to expand margins by increasing lending rates without a corresponding immediate rise in deposit costs. The lag between asset repricing and liability repricing has traditionally been a source of margin compression for banks during rate hikes.

The exposure to floating rate, repo-linked advances positions public sector lenders more favourably than competitors with higher concentrations of fixed-rate corporate advances. As the RBI considers further monetary tightening to manage inflation, PSBs with robust floating rate loan portfolios stand to benefit disproportionately from any upward movement in policy rates.

For depositors and borrowers, however, the dynamic presents a different picture. Savers in fixed-deposit schemes may see delayed improvements in returns, while floating-rate loan customers will face immediate increases in their borrowing costs. The repricing cycle is expected to create headwinds for some customer segments while providing relief to bank balance sheets.