Indian bank slashes key rates

By Sumit Sharma  |   2008-12-22  |     NEWSPAPER EDITION

STATE Bank of India, the nation's biggest, announced a cut in interest rates on loans and deposits, following previous reductions after the central bank lowered its benchmark measure to boost sagging economic growth.

The bank, 59 percent government-owned, cut the prime lending rate, or that at which it gives money to top customers, by 75 basis points to 12.25 percent from 13 percent starting January 1, it said in an e-mailed release on Saturday. It lowered deposit rates by 25 to 100 basis points across various maturities effective January 1.

The bank and other lenders have cut rates after the central bank lowered a key interest rate three times since October to 6.5 percent. Interest rates are headed down and the cost of borrowing bulk deposits has fallen by 200 basis points over the past two weeks, Chanda Kochhar, chief executive-designate of ICICI Bank Ltd, said on Friday.

Housing Development Finance Corp, India's biggest home mortgage provider, on Friday lowered the rate it charges for all loans and deposits by 50 basis points. The Mumbai-based company will charge 10.25 percent for loans of up to 2 million rupees (US$42,328) effective from today. The rate on loans of more than 2 million rupees was cut to 11.25 percent, Bloomberg News said.

The cut is for loans under the floating-rate plan and is applicable for both existing and new customers, Housing Development said. Under the floating plan, rates are raised or lowered during the term of a loan as costs rise or fall.

"The recent cuts in policy rates by the RBI have created adequate liquidity in the banking system, which had a positive impact on the cost of funds," Housing Development said. "The sharp fall in inflation is an indication that interest rates are likely to have a downward bias."

India's inflation rate has dropped to the lowest since early March as demand slowed amid the global economic meltdown and a drop in crude oil costs led the government to cut retail fuel prices. Wholesale prices rose 6.84 percent in the week to December 6 from a year earlier after gaining 8 percent the previous week, the commerce ministry said last Thursday.

State-run banks said earlier last week that they plan to offer home loans of up to 500,000 rupees at 8.5 percent. The rate will be limited to 9.25 percent for borrowers seeking loans of 500,000 rupees to 2 million rupees for a five-year term.

Slowing inflation is prompting central banks to cut interest rates as global economies slump amid the worst financial crisis since the Great Depression.

Growth in Asia's third-largest economy may slow to 7 percent in the year ending March 31 from 9 percent or more annually in previous years, the government said.