SBI cuts interest rate for medium-term deposits by 0.25 per cent

State Bank of India (SBI) cut its interest rate for medium-term deposits by 0.25 per cent on Tuesday setting the stage for other banks to follow the bellwether. "In view of abundant liquidity coupled with slower-than-anticipated credit pick-up, SBI has decided to cut rates of one-tothree-year deposits by 0.25 per cent to 8.75 per cent per annum from 9 per cent," the country's largest lender said in a statement. The reduced rate will come into effect from September 18.

SBI has also increased interest rates for shorter tenor deposits of 180-210 days by 0.25 per cent to 7.25 per cent per annum. The bank said that with inflation trending down-consumer price inflation for August eased to 7.80 per cent-the rate adjustment will continue to ensure that the depositors are compensated adequately with a positive real rate on their deposits. SBI is reported to be having liquidity in excess of `50,000 crore in its vaults creating a challenge in deploying funds, a senior SBI executive said.

Given that now the liquidity situation for banks has improved substantially over the last year and credit growth is still languishing, banks may finally start to cut rates on deposits. Punjab National Bank chairman and managing director K.R. Kamath said, "Liquidity has been reasonably good for our bank for some time now and corporate credit has not picked up in a big way. There is no point paying for deposits which cannot be deployed in profitable lending activities."

While banks may have enough headroom to reduce deposit rates, most of them may wait until Reserve Bank of India's (RBI) policy announcement by the end of this month. Kamath added, "We will hold rates probably till the credit policy is announced and then take a call. For now, we are doing away with our bulk deposit rates for one year, which was marginally higher."

RBI figures show that the banking system's year-on-year increase in credit stood at 10.94 per cent for the fortnight ended August 22, which is almost on par with the 10.61 per cent observed in 2009 in the aftermath of the financial crisis. The slow off-take in credit also appears to be reflected in the industrial growth rate slowing to a four-month low of 0.5 per cent in July.

However, there are some banks who believe that it may be too early to expect a widespread rate cut and that it would depend on each banks' asset liability situation.