SBI expects 50 bps cut in CRR, no change in lending rate

India's largest lender State Bank today said it expects Reserve Bank to lower the mandatory cash reserve requirement of banks or CRR by 50 basis points on July 31 but sees no reduction in the key short-term lending rate.

"We expect a 0.5 percentage point reduction in CRR (the percentage of deposits that banks park with the RBI) to ease money supply. Also, this will have better effect on monetary transmission than a reduction in the short-term lending rate," SBI Chairman Pratip Chaudhuri told reporters after announcing the successful conclusion of a USD 1.25 billion overseas bond sale.

RBI will announce its first quarter monetary policy review on Tuesday in the backdrop of slowing growth, poor investment sentiment and persistently high inflation.

Yesterday, SBI had closed a mid-term note or bond issue at a coupon of 4.12%, making it the largest and cheapest bond sale by a domestic lender till date. Chaudhuri said the asset quality of the Government-run
bank has improving compared to last year. He did not give any further details citing a silent period ahead of the earnings.

The bank will announce its April-June quarterly earnings on August 8. The comments came after SBI shares slumped as much as 3.8% today as a rise in non-performing assets at Punjab National Bank and Union Bank of India sparked concerns about asset quality in the Government-run lenders.

Explaining the rationale behind why a CRR cut is better at this juncture, Chaudhuri said this will help bank's liquidity, which in turn, will help them lower the lending rates, thus helping the monetary transmission better.

On the contrary, he said a marginal reduction in the repo will not help banks to cut lending rates.The senior unsecured dollar bond issue, due in August 2017, was carried through the London branch of SBI. The issue was rated Baa2 by Moody's and BBB- by S&P.