HDFC Bank cuts base rate and BPLR by 20 bps

India's second largest private sector lender HDFC Bank on Friday reduced its base rate by 20 basis points to 9.80% effective from June 30. With this, its benchmark prime lending rate (BPLR) too decreased to 18.30%. After the Reserve Bank of India (RBI) slashed the key policy rate by 50 bps in its April annual monetary policy, the lender tweaked key rates for the first time.

However, the bank's website did not post any notification on rate cut at the time of writing this article. Base rate is the benchmark rate below which a bank is not allowed to lend. RBI had introduced it in 2010 to bring in more transperancy in loan pricing while replacing the then existing practice of BPLR system, launched in 2003.

"As of now there is no official communique, though it is true that the bank has decided to decrease base rate and BPLR by 20bps effective from tomorrow," an official from the bank told moneycontrol.com on being asked about the rate cut buzz.

Earlier, country's largest lender the State Bank of India decreased the spread of between actual lending rates and base on different categories including SME loans (small and medium enterprises) and export credit by 30-350 bps.  In April, ICICI Bank was the first one to reduce base rate by 25 bps to 9.75%.

A loan is priced over base rate with a spread. SBI's current base rate stands at 10% p.a. For example, if any loan is given at 5% higher than the base rate, the rate of interest comes to 15%. Due to a drop in the spread, say by 350 bps,  the same loan will be available at 11.50% (10% + 1.50%).

Will other banks now get into rate cut mode?

Not necessarily! In its latest mid quarter credit policy, RBI kept the key policy rate unchanged citing that interest rates are still below their peak and higher rates are not hurting growth.

According to Moses Harding, head of asset liability committee and economic research at IndusInd Bank , the degree of rate cuts is very minimal. Banks would not get into major rate reduction mode immediately.

"Unless the repo rate is brought down below 8% or the system liquidity turns from deficit to surplus, the cost of funds will remain high. This situation will not  prompt banks to go for significant rate cuts," he said.

Repo is the rate at which banks borrow money from the RBI. It currently stands at 8%. The system liquidity on an average, has been hovering around Rs 70,000 crore level, above the RBI's comfort zone at around Rs 60,000 crore daily.

"Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures," the regulator said in its mid quarter policy statement, released on June 18.

saikat.das@network18online.com