In what could trigger a domino effect and spell bad times for the middle class, State Bank of India (SBI) has slashed interest rate payable on savings bank accounts from the current four percent to 3.5 percent. The move triggered a rally in the share prices of SBI and other banks.
The rate will be effective from July 31. The bank's savings bank deposits stood at Rs 7.46 lakh crore as of March 31, 2017, up almost 28 percent from Rs 5.81 lakh crore a year ago. An overwhelming portion of this would be in accounts with a balance of less than Rs 1 crore.
The cut in interest rate is on balance up to Rs 1 crore while those having above the threshold will continue to get four percent, according to a regulatory filing by SBI to the BSE on Monday.
"The decline in the rate of inflation and high real interest rates are the primary considerations warranting a revision in the rate of interest on savings bank deposits," SBI said in the filing.
The share price of SBI was trading 3.33 percent higher at Rs 309 on the Bombay Stock Exchange at around 11.50 am in response to the news, apparently factoring in the fall in interest costs for the lender. ICICI Bank was up 2.60 percent, Bank of Baroda was trading 3.34 percent while other banks were trading with marginal gains.
On the flip side for account holders, the move could see a similar response from other banks, resulting in a raw deal for depositors who are already witnessing a fall in small savings schemes run by the government and those on fixed deposits maintained with banks.
Economist Ajit Ranade said that money mobilisation following demonetisation has not only lowered the cost of raising funds but also enhanced the scope for rate cut.
The move comes ahead of the Reserve Bank of India's (RBI) monetary policy meeting scheduled for August 1 and 2. There is widespread expectation that the central bank would reduce the repo rate by at least 25 basis points from the current 6.25 percent in view of the retail inflation falling well below the threshold rates targetted by the bank.
"We expect a 25bp cut on 2 Aug, with no change in their neutral stance. The latter will allow the RBI to be non-committal on the future course of action, retaining the flexibility to react to the evolving inflation trajectory," Radhika Rao, an economist at DBS Bank, said in a note on Monday.
The BSE Bankex was trading 1.17 percent higher while the benchmark index Sensex was up 0.41 percent at 32,443, a gain of 133 points, at around 12 noon.