Expect some move on the interest rate from the country's largest bank today. State Bank of India Chairman Pratip Chaudhuri said the bank's asset liability committee that takes a call on rate actions will meet today.
The bank's rate move is in reaction to the Reserve Bank of India's police review on Tuesday, where it cut the statutory liquidity ratio (SLR) of banks.
SLR is the proportion of deposits banks need to maintain in government bonds. The SLR of banks was cut to 23 percent from 24 percent.
The move was aimed at releasing more funds to real sector, the central bank said.
At a press conference after the policy review, RBI governor D Subbarao said a cut in SLR was better than a reduction in cash reserve ratio as the latter would have had an across-the-board effect.
SLR cut will help a bank take a rate view considering liquidity issues specific to it.
The central bank had kept its policy rate and banks' cash reserve ratio unchanged, while cutting growth projection and rising inflation target for the full year.
It also painted a grim picture of the economy as it raised concerns that deficient rains will push prices up.
Chaudhury told CNBC TV18 today that the benefit of SLR cut can be passed on to the retail sector as large long-term loan proposals are very few across banks and working capital demand from corporate houses is low. However, he saw very little scope for a deposit rate cut.
"There is less room for a cut in deposit rates because the small savings rate is 8.6 percent. If you top up this 8.6 percent with subvention, a person gets 8.75 percent. Therefore, the room for deposit rate cut is slightly less but, perhaps there could be some cut at the long ends," Chaudhury said on CNBC TV18 today.
He said at the long ends, five years and above, the bank had reduced rates from 9 percent to 8.75 percent. "Then we found that the other banks are stubbornly at 9-9.25 percent. So we had to move back our deposit rates," he said.
To a question whether even these higher rates are unattractive considering the 8 percent is the return offered by tax-free bonds, he said a request will made to the government to not keep the coupon on these bonds so high.
"Since they enjoy the tax advantage, our recommended coupon to them should be 6%," he said.
He also highlighted the merits of bank deposits, saying they are liquid and they also enable one to take loans against them.
One can break them anytime and can be used as collateral for so many things, he said.
"So bank deposits will continue to have an attraction and Rs 60,000 crore should not really bother us because the total bank deposit growth in a particular year is something like Rs 7-8 lakh crore," he said.
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