RBI monetary policy: SBI expects retail lending costs to come down after SLR cut

State Bank of India, the country's top lender, expects retail lending costs to come down after the central bank cut the minimum requirement for banks' government bond holdings, its chairman Pratip Chaudhuri said.

The central bank on Tuesday unexpectedly cut the statutory liquidity ratio to 23 per cent from 24 per cent in a move to free up liquidity, while leaving interest rates unchanged for the second straight review.

The room for Indian banks to reduce deposit rates is low, he told reporters after the central bank's review.

SBI has pegged its base rate at 10% while most other banks have pegged it in the range of 10.50 to 10.75%.

However, the wide consensus was that banks will not cut their lending and deposit rates following a 1% cut in the statutory liquidity ratio (SLR) by RBI.

"The cut in SLR will have no impact on lending rates or the deposits rates. we expect more action from RBI to initiate a cut in rate," said R K Bakshi, executive director of Bank of Baroda. The cut in SLR came as a surprise as most banks are holding excess government securities than mandated. Bankers say that only a cut in policy rate like repo rate and cash reserve ratio would have prompted them to lower deposit and lending rates.

C V R Rajendran, executive director of Bank of Maharashtra says that lower demand for credit may force banks to cut the lending rates. "A cut in SLR gives comfort to a lenders that if credit growth happens. They can sell some government securities to create immediate liquidity," he said. Banks are holding 2-3% excess securities than mandated since there is lackluster demand for credit so far.

However according to Ashok Dutt, executive director of Dena Bank the banks may cut lending rates if deposit rates come down. "Deposit rates are softening and if it continues banks may cut lending rates as well. The SLR cut is only a measure to provide liquidity if it suddenly dries up."

(With inputs from Sangita Mehta)