The monetary as well as the fiscal measures have finally prompted the largest lender of the country, State Bank of India (SBI) to reduce its interest rates. SBI has declared a 75 basis points cut in its benchmark prime lending rate (BPLR) from 13% to 12.25%.

At the same time the bank has also informed that interest rate of all its deposit with different maturities would come down by 25 to 100 basis points. A 1,000-day deposit will earn the highest rate of 9% against 10% earlier in the deposits slab. The short-end deposits of 15 to 45 days will yield a return of 4.75%.

The reduction in the BPLR which will be effective with the beginning of New Year, January 1st 2009 is expected to scale down the floating interest rates on existing auto and education loans.

The rate cut by SBI is likely to be followed by others in the industry. An executive from Bank of Baroda said, "SBI's decision will induce other banks, including us, to cut rates. We will study the implications on the net interest margins and the inflation trend and review interest rates next week." Even an executive with Allahabad Bank agreed to this view and said that since the industry leader has resorted to a cut in its interest rates, others will now be prompted to take a similar move.

T S Narayanasami, Chairman of Indian Banks' Association said, "PSU banks are set to cut deposit and lending rates by about 100 to 150 basis points in January."

Earlier Punjab National Bank (PNB) and Union Bank of India had reduced their PLR to 12.5% each. This was the lowest rate in the industry until a cut announced by SBI. Last month also public lenders including SBI had reduced their PLR by 50 to 75 basis points. Even the deposit rates were revised down at the starting of the month only.

The decision by SBI comes two days after finance secretary Arun Ramanathan met the chiefs of public sector banks and agreed to reduce lending and deposit rates from January.

Even the private lenders, HDFC Bank and YES Bank have cut their PLR to 16% and 16.5% respectively. However no other private players have taken such a move as yet. The largest private player, ICICI Bank said that it would wait till February before cutting down the rates. Joint Managing Director and CFO of the bank, Chanda Kochhar said that the bank has a large number of deposits raised at high cost.

A senior official from ICICI said, "We see a downward trend in rates and, as such, will continue to watch the situation."