Anticipation mounts about RBI policy rate

In a surprising move for the markets, State Bank of India (SBI) slashed interest rate to 3.5% per annum for savings balance below Rs 1 crore, while for balance above Rs 1 crore customers will continue to earn interest at 4% per annum.
 
SBI’s 90% of total savings accounts have less than Rs 1 crore of deposits. These customers would face the implications of such a move and would start earning lesser interest on their deposits.
 
While elaborating on the reasons for this action, SBI, in a filing with the exchanges, stated, “The decline in the rate of inflation and high real interest rates are primary considerations warranting a revision in the rate of interest on savings bank deposits.”
 
Further, the bank had cut the MCLR by 90 basis points effective January 1, 2017 on the strength of large inflows in savings and current accounts during the demonetization period in the months of November and December 2016. Currently, the bank’s overnight MCLR rate stands at 7.75% as of July 1, 2017.
 
As per market experts, SBI had two choices – either to raise MCLR rate or to reduce the savings account interest rate. SBI did not go for raising the MCLR rate since it would increase the cost and EMIs for various segments like agriculture, SMEs, retail housing and affordable housing.
 
SBI’s decision may start a rate war among large PSUs and private banks but the mid-sized and small banks may hold the rates to maintain or marginally gain in their market share. All eyes are on the RBI’s policy decision due on August 2, 2017. SBI’s decision has boosted the widely anticipated RBI rate cut in their latest policy decision.