Banks see a softening of interest rates

Banks in India may use the additional liquidity released by the lowering of cash reserves to lend at reduced rates to some select sectors where demand for credit is very high, chairman of the State Bank of India (SBI), the country's largest lender, said today.

These sectors may see "some softening in cost of funds," Pratip Chaudhuri, chairman of SBI said, adding that this would in turn boost credit in sectors like housing where demand is more while lower rates would help reduce defaults.

While the Reserve Bank of India (RBI) left its key policy rates unchanged, it lowered the cash reserve ratio (CRR) or the amount banks have to set aside as reserve, by 0.5 per cent, helping thereby to infuse Rs32,000 crore into the system (See: RBI cuts CRR by 0.5%; leaves other rates unchanged).

Chaudhury expects interest rate spreads to come down over a period of time. While lending rates in some sectors may come down, banks will also have to review deposit rates, he noted.

He, however, expects savings rate in the country to stay unchanged.

While the RBI's monetary policy is still to veer off its inflation anchoring, over a period of time, bankers expect a general easing of its policy stance once inflationary pressures ebb.