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HDFC Bank, India’s second largest private sector lender, has decided to reduce its base rate (minimum lending rate) by 10 basis points (bps) to 9.6 per cent. The rate cut will be effective from Saturday, said people familiar with the development.
The private lender is the first bank to reduce its lending rate after the Reserve Bank of India (RBI) cut its repo rate by 25 bps on March 19.
HDFC Bank’s base rate will now be the lowest among large banks. ICICI Bank’s base rate is 9.75 per cent, while the minimum lending rate for Axis Bank is 10 per cent.
Among public sector banks, the State Bank of India (SBI) has one of the lowest base rates, at 9.7 per cent.
While RBI reduced the repo rate by 100 bps and the cash reserve ratio (CRR) by 75 bps, banks have cut their base rate by much smaller magnitude.
This has raised doubts over effective transmission of monetary policy actions.
Including the latest rate cut, HDFC Bank has reduced its base rate by 40 bps since the beginning of this financial year. ICICI Bank has pared its base rate by 25 bps and SBI by 30 bps during this period. Axis Bank has not changed its minimum lending rate so far this financial year.
While a few state-run lenders such as the Punjab National Bank and Bank of Baroda have cut their base rate by 50 bps since April 2012, their base rates are still relatively high, at 10.25 per cent.
According to CRISIL, subdued deposit mobilisation and an all-time high credit-deposit ratio will limit banks’ ability to cut lending and deposit rates across the board. It estimates that the median base rate reduction of 10 banks between April 2012 and February 2013 was only 20 bps.
In a recent report, Bank of America Merrill Lynch noted that reduction in lending rates was essential for reviving India’s slow economic growth.
Global downturn, high interest rates, muted investments and poor rains have led to deceleration in India’s economic growth.
The gross domestic product (GDP) is now expected to grow at its slowest pace since 2003-04. The GDP is estimated to grow at five per cent in the current financial year.
