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THE country’s largest lender, State Bank of India, has lowered its deposit rates by 25 basis points across all maturities. The move is seen as a prelude to a cut in lending rates, particularly in light of finance minister Pranab Mukherjee’s recent meeting with banks, where he urged them to reduce interest rates on loans.

Following the announcement, SBI will offer 7.5% on its special 1,000-day deposit and 8% on 8-10 year deposits. Six months back, the bank was offering 11% to senior citizens under its 1,000-day special scheme.

Although the cost of funds for borrowers has not gone down even after the meeting between banks and finance ministers, SBI chairman OP Bhatt had said immediately after the meeting there is scope to bring down lending rates as well as deposit rates. The bank has implemented the deposit rate cut, but it is yet to reduce its prime lending rate. The bank’s prime lending rate is currently pegged at 12.25%. SBI has not reduced its lending rates since January 2009 despite several rounds of reduction in deposit rates.

SBI’s rate cut will give other institutions headroom to bring down their cost of funds. “We could look at our deposit rates,” said Keki Mistry, MD & VC of HDFC. Mr Mistry pointed out that the institution is largely dependent on wholesale funds that it is presently raising at around 7.25% for three years.

According to Mr Mistry, interest rate trends are expected to become clearer after the Union Budget. Although the finance minister wants lower rates, yields on government securities have been rising in recent days over fears of higher government borrowing.

SBI’s deposit rates are now more or less in line with the industry. Union Bank of India is offering 8% for 1,000 days, while Bank of Baroda is offering 7% for one year and above. According to the new rate structure, SBI will offer 3% for 15 to 45 days, 4% for 46 to 90 days, 5.25% for 91 to 180 days, 6.25% for 181 days to one year, 7% for one to two years, 7.25% for two years to less than 1,000 days.

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