Mumbai: India’s largest lender State Bank of India (SBI) on Friday cut interest rate on retail term deposits by 25 basis points (bps).

In a stock exchange filing, the bank said it has reduced the pricing of term deposits below 1 crore to 8.5% from 8.75% for a maturity of one to five years. The new rate will be applicable from 8 December, SBI said in the filing.

Additionally, interest rates on fixed deposits with maturities of five years and above will be brought down to 8.25% from 8.5% currently. This is lower than the 8.5% that India Post and National Savings Certificate offer on five-year deposits.

A number of banks including ICICI Bank Ltd, HDFC Bank Ltd, Kotak Mahindra Bank Ltd and IDBI Bank Ltd have all reduced their fixed deposit rates by 10-75 bps over the last few weeks as liquidity becomes easier and credit offtake is slower. The lower deposit rates are likely to be a precursor to lower lending rates.

On Tuesday, Reserve Bank of India (RBI) chose to keep its key policy rates unchanged, while hinting that a rate cut may come early next year.

In his post-policy interaction with the media, governor Raghuram Rajan had said he expects banks to pass through lower borrowing rates once they are confident that interest rates will only ease. “Even though rates have come down, they (banks) have not passed it on...(but) I do believe that once banks are confident that rates will come down and stay down, they may start passing through more," Rajan said.

The rate on one-year commercial paper through which companies borrow short-term funds has eased from a peak of 9.38% in October to 8.91% now. The rate on one-year certificate of deposit (CD) through which banks raise money has eased from a peak of 9.08% in early October to 8.62% now.

Lower rates on market-borrowing instruments may also lead to companies shifting their borrowing needs away from the markets, putting competitive pressure on banks which are already seeing low credit growth. Bank credit grew at near 11% for the fortnight ended 14 November.

Previously in October, SBI had reduced the interest rate on short-term deposits by 100 bps to 5% from 6% earlier. Similarly, Oriental Bank of Commerce and Punjab National Bank, too, had reduced interest rates on deposits by 25-50 bps.

At 12:13pm, SBI shares were trading at 319.75 on BSE, down 0.3% from its previous close.