As interest rates soar across the board, India’s banking industry faces a new issue in its accounts: basis risk.

This is a potential risk where a hedge is imperfect, leading to losses.

In this scenario, the experts see that a rise in lending rates will not be able to follow a rise in deposit rates, which will have an impact on net interest margins.

Thus, the transmission on deposit rates was slower than that on lending rates. This would force lenders to reassess their debts more quickly in the coming months.

Weighted average domestic term deposit rates in August rose just 26 basis points this year, compared to the 190 basis point increase in the repo rate so far, according to available data. with the Reserve Bank of India.

However, the weighted average lending rate increased by 41 basis points for all commercial banks listed, while the lending rate based on one-year marginal costs increased by 50 basis points.

Non-food credit recorded 16.9% year-on-year growth in the fortnight ending September 23, according to RBI data. By comparison, total deposits grew 9.2% year-over-year.

As demand for credit remains strong despite rising lending rates, banks have been forced to raise interest rates for their fixed depositors.