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Bank of Baroda and Canara Bank have increased their MCLR by up to 10 basis points, effective June 12, 2026. This move, despite a stable repo rate, highlights the industry-wide pressure on banks to manage rising deposit costs. Learn why banks are hiking lending rates and how this impacts banking sector margins and investor sentiment.
What Happened
Public sector lenders Bank of Baroda and Canara Bank have announced an upward revision to their Marginal Cost of Funds Based Lending Rate (MCLR). Effective June 12, 2026, the increase ranges from 5 to 10 basis points across various loan tenors. This adjustment follows a recent similar move by HDFC Bank, signaling a broader trend among major Indian financial institutions to tighten lending benchmarks despite the Reserve Bank of India (RBI) maintaining the repo rate at 5.25%.
Why Banks Are Hiking Rates
Investors may find it puzzling that banks are raising lending rates when the central bank’s repo rate remains steady. The primary driver is the rising cost of funds. Indian banks are currently facing intense competition to mobilise deposits, as household savings shift toward alternative assets like mutual funds and equities. With deposit growth often lagging behind credit demand, the credit-to-deposit ratio remains high across the banking sector. By raising the MCLR, banks aim to balance their margins and offset the higher interest expenses they must pay to attract fixed deposits. Essentially, this is a defensive strategy to protect Net Interest Margins (NIM) in an environment where borrowing funds is becoming more expensive.
Impact on Borrowers
This decision has specific implications for bank customers. Borrowers with floating-rate loans linked to the MCLR—typically older loans taken before October 2019—will face a reset in their interest rates upon their next scheduled review date. This could result in higher monthly EMIs or an extension of the loan tenure. It is important to note that most retail loans sanctioned after October 2019 are linked to an External Benchmark Lending Rate (EBLR), often tied directly to the repo rate. Since the repo rate has remained unchanged, EBLR-linked loan customers are unlikely to see an immediate impact from these specific bank adjustments.
The Investor Perspective
For stock market investors, this trend offers a look into the operating environment of public sector banks. While the increase in lending rates helps banks maintain their profit margins, it also reflects the broader pressure on liquidity. If banks continue to hike lending rates, there is a risk of a slowdown in credit growth, particularly in sensitive sectors like retail and MSMEs, which are sensitive to interest rate hikes. Investors are currently watching whether banks can pass on the rising costs of deposits to borrowers without significantly hurting the demand for fresh loans.
What Investors Should Track
Going forward, the key monitorables for shareholders in the banking sector include the quarterly trend in Net Interest Margins (NIMs) and the movement of the Credit-Deposit ratio. If banks can successfully manage the cost of mobilisation while maintaining healthy credit disbursement, it suggests efficient balance sheet management. However, if deposit growth continues to struggle, banks may face continued pressure on their profitability. Analysts and investors will also look for management commentary in upcoming earnings calls regarding their liquidity strategy, the sustainability of deposit growth, and whether this cycle of rate hikes is expected to continue given the current inflationary and macroeconomic outlook.