India's largest bank may have started a rate cutting competition
State Bank of India( SBI) has decided to bring its rates on deposits and short-term loansover ₹1 lakh in line with the Reserve Bank of India’s repo rate.
- In doing so, SBI has become the first bank to announce the linking of its savings and retail lending rates with the interest rate determined by the
- Following the move, which will be effective May 1st, other banks are also expected to cut rates.
India’s largest bank, the State Bank of India (SBI), decided at the end of last week to bring its rates on deposits and short-term loans over ₹1 lakh in line with an external benchmark - the Reserve Bank of India’s repo rate, or the rate at which the central banks extends funds to commercial lenders.
The move will be effective May 1st, 2019. In doing so, SBI has become the first bank to announce the linking of its savings and retail lending rates with the interest rate determined by the RBI.
Deposit rates will start at 2.75 percentage points less than the repo rate while lending rates will be priced at a 2.25% premium at the most- subject to the borrower’s credit profile.
The repo rate is currently 6.25%, following the RBI’s decision to cut rates by 25 basis points in early February.
The decision follows repeated calls by the central bank for domestic lenders to transmit lower rates to customers in the interest of boosting credit growth and spurring the economy. It has set a deadline of April 1st, 2019 to comply with an order to set rates according to the external benchmark.
As a result of SBI’s decision, the bank’s customers will earn more on their deposits - which will lead to an uptick in deposit growth. Deposit growth in the banking sector has been slowing as of late, and SBI is determined to take on competitors in the private space that offer higher rates on deposits.
Concurrently, a reduction in short-term lending rates will translate into higher demand for retail loans in the near term.
More importantly, other banks could follow suit. Anil Gupta, the head of financial sector ratings at ICRA, told the Economic Times that he expects that “all the public sector banks and few large private banks will follow the move by linking their deposit and lending rates to repo rate”.
While the move isn’t exactly zero-sum, SBI’s premium spread between deposits and loans can be altered to protect its profit margins. If inflation continues to stay subdued, the RBI might cut rates again at its next meeting. Hence, a reduction in deposit rates will offset lower margins on retail loans.
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