Bank reduces base rate by 25 basis points, bankers say India may be headed for a softer interest rate regime
With the fall in prices of crude oil and other commodities, India may be headed for a softer interest rate regime.
Firing the first salvo towards softer rates was Axis Bank, India's third largest private sector bank. It revised downwards its base rate from 10.25% to 10.15% with effect from October 15.
Accordingly, the effective rate applicable to various fund based credit limits, which are linked to the bank's base rate, will reduce by 10 basis points.
Most banks have their base rate at 10% and HDFC Bank has the lowest base rate of 9.8%. Banks like YES Bank have a higher base rate at 10.75%.
Announcing the revision in rate, Sidharth Rath, president (treasury, business banking & capital markets), Axis Bank, said the bank reduced base rate as the cost of fund has eased due to softening of interest rates based on improving liquidity and other macroeconomic developments.
Crude oil prices fell to a four-year low of $83 a barrel on Thursday, raising prospects of further cuts in retail fuel prices besides bolstering the government's plans to tame inflation and cut subsidies. But with doubts being raised on global growth, it is still too early jump on the bandwagon to reduce rates, said a few bankers.
The consumer price inflation for September cooled off to its all-time low of 6.46%, the lowest since India started computing consumer price index(CPI) in January 2012 led by lower food prices and fuel costs.
On September 17, SBI brought down its peak interest rate on domestic term deposits between one and three years to 8.75% from 9% earlier, while the bank raised rates by 25 basis points on deposits between six months to 210 days to 7.25%.
With the credit growth sluggish at 11%, banks may be bringing down interest rates to attract customers. After remaining sub-10% for two consecutive fortnight bank credit went up 11% to Rs 62,69,007 crore for the fortnight ended October 3, according to RBI data.
Mohan Shenoy, head of treasury at Kotak Mahindra Bank, said, "With the fall in commodity prices and crude oil prices, it certainly looks like India is headed for a softer interest rate regime. The liquidity situation in the money markets have improved after RBI introduced the various borrowing facilities."
Bank borrowing from RBI's borrowing facility (repo window) has also come down with banks drawing only Rs 17,498 crore from the central bank facility, down from Rs 1 lakh crore they were borrowing a few months back after RBI introduced the new liquidity framework by introducing various facilities like 7-day repo, 14- day repo and 21-day repo.
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