SBI Takes The Lead

India's largest bank, State Bank of India (SBI), has taken a lead in reducing deposit rates. While lending rates are now linked to the external benchmark repo rate for better and faster rate transmission, deposit rates are still sticky, which raises concerns about borrowers getting lower rates in future. SBI and a few other banks have made a beginning by reducing deposit rates, but it is only restricted to term deposit rates.

In addition, private sector banks are still offering higher term deposit rates. There are questions on whether the recent deposit rate cut will sustain for long because of competitive pressures. Similarly, there is also scope to reduce the rate on savings deposits, which account for a big chunk of banks cost of funds.

Many suggest the RBI should nudge banks to also link their deposit rates to the repo rate. If both lending and deposit rates are linked to the repo rate, asset liability management will improve and there will be faster transmission of rates and more transparency.