The country's largest lender, State Bank of India (SBI) on Tuesday reduced its lending rate by 0.4% as soon as the Governor of Reserve Bank of India (RBI), Raghuram Rajan, surprised by a 50 basis points (bps) cut in repo rate.
SBI reduced its lending rate to 9.3% per annum. Another public sector lender, Andhra Bank, also slashed its interest rate by 0.25%.
ICICI Bank and Axis Bank--two of the India's largest private banks--also reportedly indicated that they would reduce their lending rates.
Earlier, giving in to the repeated demands of government and industries, the RBI announced the fourth cut in repo rate in 2015, from 7.25% to 6.75%, the lowest in four-and-a-half years. The announcement came after its fourth bi-monthly monetary policy in the current fiscal on back of moderating inflation and favourable global commodity and oil prices.
While the RBI decision will benefit borrowers, it will also bring down interest rates on bank deposits. Meanwhile, the government also announced that it will review the interest rate on small savings, PPF and post office deposits to bring them in line with market, according to reports.
Rajan justified the lowering of repo rate saying consumer inflation was likely to be around 5.8%, well below the target of 6% for January.
Reacting to the RBI move, Union Finance Minister Arun Jaitley said that the decision will significantly provide policy support to the economy and help in the recovery process.
"We are looking forward now to the transmission of these cuts which will effectively help to boost confidence and investment. They will also help to realise the economy's medium term potential growth rate," Jaitley was quoted as saying by media reporters.