Soon after SBI reduced its interest rates, other PSU banks also seem to follow the leader. State-run, Bank of India and Bank of Baroda have reduced their benchmark prime lending rate (BPLR) by 75 basis points to 12.5% from 13.25% each. This will reduce the lending rates of all the loans linked to BPLR.

All the borrowers who were planning to switch from their floating rate loan to a fixed one might sit back on their plans now. The existing floating interest rate of loans such as home loans, education loans, auto loans, personal loans and SME loans would witness a downward movement with the effect of new PLR from January 1st, 2009.

Bank of India is likely to announce a special reference rate for its home loans because they are not linked to its BPLR. Chairman and Managing Director of Bank of India, Mr T S Narayanasami said that the home loan rates would be reduced but the reduction may not be in line with the BPLR cut.

The deposit rates of the banks have also declined which are effective also effective from January 2009. Bank of Baroda's deposit rate has been cut by 50 to 100 basis points across all maturities and Bank of India has cut its 1-year term deposit rate from 9.75% to 8.5%.

All the banks are cutting down their lending as well as deposit rates because they are facing a falling demand for loans due to increased interest rates and slowdown in the economy. However the actual decision on the rate cut came only after the RBI's announcement of cuts in the policy rates.