The Reserve Bank of India's move to increase the availability of funds and outset a low interest regime has started showing its impact, as some state run banks have cut the deposit rates while others are likely to follow the suit.
On January 2nd, immediately after the RBI announced a cut in its key policy rates, Union Bank and Bank of Baroda reduced their deposit rates by 25 to 75 basis points across various maturities.
The reduction in the deposit rates by the banks is likely to induce banks to reduce their lending rates as well.
Chairman and Managing Director, Bank of Baroda M D Mallya said: "Lending and deposit rates will have to come down. This time, deposit rates will have to come down first before lending rates. Indeed, there is a case of further softening of interest rates given that there are expectations that inflation will come down further."
M V Nair, Chairman and Managing Director of Union Bank of India said: "This move by the RBI was well anticipated. We have decided to cut deposit rates and subsequently reduce lending rates." Deposit rates of the banks are reduced by up to 1.35% across various tenures and are valid from January 5th. The bank is likely to take a decision on a reduction in its benchmark prime lending rate (BPLR) within this week.
With the reduction in interest rates, deposits with tenure of 1 year and 90 days will earn 8% against 8.75% earlier. Similarly deposits of 90-months and above 90-months will also attract interest rate of 8% against the earlier rate of 8.75%.
A C Mahajan, Chairman and Managing Director of Canara Bank said: "Coupled with reduction in inflation and cut in CRR interest rates will definitely come down. However, the impact of CRR cut on the cost of funds has to be studied before taking further action as most of the banks have reduced PLR by 75 bps just two days back. Further cut in lending rates will have to wait for sometime till such time the impact of reduction in deposits rate also get filtered."
Meanwhile, following the RBI's reduction, the largest lender, State Bank of India is likely to review the interest rates. Chairman of the bank, Mr O P Bhatt said, "Depending upon what signals come from RBI and how strong it is, we will definitely review our rates, both on the lending side as well as the deposit side in our assets and liability committee, and as we have done in the past, we will take a lead position on this also."
PNB had already anticipated a rate cut by RBI and therefore reduced its deposit as well as lending rates before the announcement of the RBI. The bank has reduced the deposit rates by 100 basis points to 8.5% and PLR by 50 basis points to 12%, the lowest among the major banks.
K C Chakrabarty, Chairman and Managing Director of PNB said: "Banks do not have much choice. They will have to reduce interest rates further. PNB had anticipated it and therefore cut lending and deposit rates."