The country's largest lender, State Bank of India (SBI), has cut its base rate by 25 basis points and has brought its base rate down to 9.75 percent from the existing 10 percent. Base rate is the lowest rate below which banks are not permitted to lend.

The base rate reduction was announced by the Chairman of SBI, Mr. Pratip Chaudhuri, who also said that the rate cut could lead to a reduction in its profitability. He said that this move may lower the net interest margins of the bank by 4 basis points, but it will be made up by the expected growth in business. Home and car loans segments will be hit the most by the rate cut.

A reduction in base rate means that the borrowers can avail loans from SBI at a lower rate than what it was offering earlier. Retail loan borrowers are expected to be benefitted the most.

SBI has lowered its base rate following the reduction in cash reserve ratio by the central bank. RBI had cut CRR by 25 basis points, releasing about Rs. 17, 000 crore into the banking sector. On RBI's move, SBI chairman said that the rate cut introduced in the mid-term policy will have a significant effect on the economy.

It is speculated that this move by SBI could trigger other leading banks too to cut their interest rates. The banks which could respond are banks like Punjab National Bank, ICICI Bank etc.