(Bloomberg) -- State Bank of India, the country's largest lender, led bank shares higher after it cut the interest rate it pays on customer deposits for the first time since at least 2003, raising speculation that peers will follow.
The Mumbai-based bank cut the rate on savings deposits of less than 10 million rupees ($156,000) by 50 basis points to 3.5 percent, while retaining a 4 percent rate for deposits above that amount, according to an exchange filing on Monday. SBI shares surged 3.9 percent at 1:44 p.m. in Mumbai, while Bank of Baroda gained 3.3 percent and ICICI Bank Ltd. added 2.7 percent. The Bankex index of 10 lenders rose 1.4 percent to a record.
The cost of funds for SBI's more than eight trillion rupees of deposits will ease after the cuts, Rajnish Kumar, managing director of State Bank of India, said in a conference call. He didn't provide an estimate of the cost savings as the bank is in a silent period before announcing its June quarter earnings. The lender's stock is rising as SBI's net interest margins can widen by as much as eight basis points from the current levels due to the cut, bolstering profits, Aalok Shah, an analyst with Centrum Broking Pvt. said.
“The step sends two signals; first on the systemic front the deposit rates are headed for moderation,” Shah said. “Also, it may nudge other banks to follow suit.”
More than 60 percent of the 1.5 trillion rupees that came into SBI's savings bank accounts following a cash ban announced by Prime Minister Narendra Modi in November has been withdrawn, putting pressure on the lending margins, SBI's Kumar said.
To read more on India's November demonetization, click here
A decline in the rate of inflation and high real interest rates are the primary reasons for a cut in rates, the bank said in the filing.
To contact the reporters on this story: Anto Antony in Mumbai at aantony1@bloomberg.net, Nupur Acharya in Mumbai at nacharya7@bloomberg.net.
To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Candice Zachariahs, Arijit Ghosh
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