Indian Banks Cut Deposit Rates, Bank Rates Set to Fall by Up To 5 Percent
Banks in India, led by Government owned State Bank of India are set to reduce their deposit rates by over 50 basis points by mid January, after another 100 basis point reduction in official lending rates effected on Friday by the Indian central bank the Reserve Bank of India (RBI).
Banks must first lower their funding costs which is subject to a time lag regardless of whether they implement changes in deposit rates immediately, whilst a reduction in lending rates affect their incomes instantly.
Last week India’s largest bank, State Bank of India lowered its deposit rates, after the RBI cut official interest rates by over 250 basis points since the beginning of its interest rate easing cycle.
A senior executive with State Bank of India told the Business Standard that it would again review its interest rate policy in the wake of the latest round of easing by the central bank. “There could be a further 50-75 basis point cut in our interest rates. The decision could take place by the middle of this month. While this may reduce the cost of borrowing for the customer, the issue is improvement in credit off-take since industry is facing a demand slowdown,” he added.
In response to the RBI easing state owned Syndicate Bank announced that it would lower its benchmark prime lending rate by 75 basis points to 12.50 per cent from January 17. It said that it would also cut its deposit rates by 25-75 basis points across different maturities. Private sector lender Bank of Rajasthan also reduced rates on term deposits by 35-50 basis points.
Other banks are expected to follow suit. Whilst HDFC Bank’s asset-liability committee is expected to decide over the next fortnight, an Axis Bank executive said home loan rates would be cut by 25-50 basis points over the next seven to 10 days. “Since we have among the healthiest current and savings account base in the industry, we have preferred to stay away from frequent revisions in rates. Our cost of funds is quite manageable now and we hope to reduce lending rates further,” he said.
ICICI Bank has also indicated that it will lower deposit rates by another 50 basis points though it did not say by when. “This reduction, coupled with the fiscal measures, is an excellent combination. Credit will flow much better to industry, particularly to auto and housing, as a result of these measures,” said the bank’s Executive Director V Vaidyanathan.
Last week, the RBI lowered the Repo and the Reverse Repo rates by 100 basis points each to their lowest levels ever, while the cash reserve ratio, or the proportion of deposits banks need to set aside, will be cut by 50 basis points to 5 per cent from the fortnight starting January 17.
This the fourth round of rate cuts by RBI since October, after the global credit crisis intensified. The moves are aimed at stepping up credit flow, with loan growth showing signs of a slowdown, and boost economic activity.
In an interview with the Economic Times, ICICI Bank chief executive KV Kamath said he believed that interest rates would fall by up to 5 percentage points below where they are today within the next six months.
“All I can say is that there will be four-to-five percentage point correction in interest rates from where it is today. This correction, I think, will be by July. This is where the rates are heading in six months from now,” Mr. Kamath said
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