Domestic credit costs will continue rising through 2023 as the full degree of interest rate increases takes effect, impacting investment and borrowing behavior in India

Expect the RBI to keep interest rates higher for longer

Companies should account for a scenario of higher-for-longer (through most of 2024) interest rates in India. This trend will weigh on companies’ own investment and CAPEX decisions, cost of borrowing for their local partners and dealers, and inventory holding costs. B2B should expect their customers (especially SMEs) to be more cost-conscious in the coming months, making it imperative for MNCs to orient their products and solutions toward cost optimization as much as possible. Companies selling large capital equipment and machinery should consider leasing out instead of selling equipment to enable customers to protect their cash flows.

Rising interest rates will increase costs of personal loans (home, vehicle, and credit card) for consumers. Firms selling into these end segments should expect an impact on demand, as consumers are likely to become more conscious of their spending patterns for these items. B2C firms selling discretionary products should expect a hit to the demand for their products as a secondary effect as well. The impact of these rising costs will weigh on demand from the middle- and lower-income consumer segment more than they will from the higher-income segment.


As with most central banks around the world, the Indian central bank has also been raising its benchmark interest rate rapidly since early 2022 in response to high inflation and US monetary policy. The Reserve Bank of India (RBI) has hiked its interest rate by 250 basis points since January 2022, with another 25-basis-point hike expected next month. With this, the benchmark interest rate will be at levels last seen in Q1 2016, but still lower than 2015 levels.

But the benchmark interest rate is not the only—or even the most—important lending rate for firms to track in India. The Weighted Average Lending Rate (WALR) and Marginal Cost of Funds-based Lending Rate (MCLR) are more accurate representations of rates at which domestic commercial banks extend credit to companies and individuals. These rates tend to be several percentage points higher than the benchmark interest rate and change with a lagged effect compared to the benchmark interest rate. While the benchmark interest rate has risen by 250 basis points since January 2022, the WALR and MCLR have risen by about 120 basis points each in the same period.

Even though the full effect of the benchmark interest rate hikes has yet to be felt by businesses and consumers, rising costs are slowly impacting borrowing and lending behavior. Credit deployment growth to small industrial companies has fallen to 15% YOY compared to ~25% in early 2022; credit card loans have risen back up to more than 30% YOY after falling below 10% YOY through the pandemic. Other personal loan growth remained strong at a growth rate of close to 20% YOY.

Our View

Domestic interest rates will continue to rise through the rest of 2023 until the full effect of benchmark interest rate hikes has taken effect. While the benchmark interest rate will not rise to levels seen in 2015, the last time the RBI hiked interest rates by 250 basis points within a two-year period was in 2012. Rates were gradually cut soon after they peaked back then, but the RBI is more likely to keep interest rates higher for longer (as will the US Federal Reserve) this time. This rapid pace of increase will further exacerbate the impact of higher costs on spending and investment behavior. Compared to other central banks around the Asia Pacific region, India’s central bank has been less aggressive than those in Australia, New Zealand, and the Philippines, but more aggressive than banks in the rest of Southeast Asia, Japan, and China.

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