Deposit rate cut step towards softer interest rate era: SBI

India's largest lender State Bank of India (SBI) on Thursday reduced its retail deposit rates by 25 basis points in tenure up to 240 days with effect from June 08, 2012. It had cut interest rate on loans given to small and medium enterprises (SMEs) some time back.

In an interview to CNBC-TV18 Diwakar Gupta, managing director and chief financial officer, State Bank of India said, this deposit rate cut was only a minor readjustment. "This is also to signal that we want to play along with efforts for a softer interest rates regime." Justifying this move, Gupta also said the bank is reasonably comfortable on the liquidity front and would cut rates on advances and deposits only when the overall economy warrants it. However, the bank would not reduce rates at the cost of margins, he said. "Given the fact that if rates reduce in any case assets reprice faster and therefore margins could be under a little pressure. We want to keep it margin neutral,"he added.  Below is the edited transcript of Gupta’s interview with CNBC-TV18. Also watch the accompanying video. Q: We got a statement on the BSE that you have decreased deposit rates by 0.25% for several tenures up to 240 days. What’s the next step? Will it mean also that lending rates will follow? A: We have already cut lending rates on the SME leg very significantly and that is in production already. So this is just a minor readjustment amongst the difference buckets to rationalize our rates. This is also to signal that we want to play along with efforts for a softer interest rates regime and to pass on some of the benefit that we have by way of regained profits in the new capital infusion, the CRR release. It’s more a signal than substantive, but hopefully it will be in the direction of where we want rates headed going forward. Q: Are long-term deposit rates also likely to b cut anytime soon following this? A: We would definitely like to reduce rates on both advances as well as deposits when the overall economy warrants it. Today we have done this because we are reasonably comfortable on liquidity, but we need to watch the situation. We would like to do it, not just deposits even advances, but there is no decision on it yet. Q: Given this combined impact like you pointed out you have reduced lending rates for some SME categories a couple of months ago and now this deposit cut. What is the combined impact on margins, untouched? A: Yes, we would certainly not like to reduce rates at the cost of margins. Given the volatility and given the fact that if rates reduce in any case assets reprice faster and therefore margins could be under a little pressure. We want to keep it margin neutral. Q: What are your expectations from RBI on the 18th? Everyone is talking about a rate cut which is more or less eminent, but would you go with 25-50 or zero perhaps? A: No, I steadfastly maintain that it would be very risky to double-guess the regulator, but yes if a rate cut happens I guess everybody will welcome it. Q: If a rate cut happens of 25 bps, are we likely to see the banks following suit immediately? A: The base rate is a signal rate. If it comes along with a CRR cut then banks will be better placed to immediately pass on some benefit. Otherwise, naturally banks will be guided by their own asset and liability profile. Q: How do SBI’s deposit rates compare with say your next competition ICICI or broadly the banking space? I would assume given your dominant position you would anyway be one of the lowest or the market average. With you dropping rates would it be logical therefore to expect the industry to follow? A: We are not the lowest in all buckets. We are somewhere in the median. We do this because we understand that SBI has certain brand equity. Obviously there would be players then who would be forced to benchmark themselves above us. We have not really been guided so much by the competition than by own liquidity and deposit gathering.