The government's move to cut the small savings rate by 0.6% to 1.3% will soften lending rates. Banks are expected to cut deposit rates in the next fortnight.

With the Reserve Bank of India (RBI) expected to cut interest rates by at least 0.25% in its first bi-monthly monetary policy for fiscal year 2016-17, slated for April 5, the banks will start reducing their deposit rates to keep themselves ready for lending rate cut in the first quarter of the next financial year.

The first quarter is generally a slack season for credit, and hence, a slow deposit growth is not expected to impact banks' resources.

To begin with, Oriental Bank of Commerce already announced a cut in its one-year deposits from 7.75% to 7.5% effective March 28.

A senior State Bank of India (SBI) official told dna they are going to look at reducing deposit rates with the busy season for credit coming to an end. "Our asset-liability committee (Alco) will be meeting next week to take a call on the deposit rates. But for the one-year deposits, SBI is having the lowest rate. We will have to see other maturities for which the rates have to be realigned. The shorter tenures deposit rates may get revised downwards," said the banker.

One-year deposit rates of some of the big banks range between 7.25% to 8%. SBI offers one-year deposit 7.25% while Bank of India has a one-year term deposit rate of 7.3%. ICICI Bank, Bank of Baroda and Canara Bank have a one-year deposit rate of 7.75%, while HDFC Bank and Axis Bank offer 7.9%.

Ravi Shenoy, assistant vice president - midcaps research, Motilal Oswal Securities, said, "The surprise rate cut in small-savings rates by 0.6-1.3% should allow banks to lower fixed deposit rates, and hence, lower lending rates. We expect a 25-50 basis points cut by various banks in deposit and lending rates in the next two weeks. Also, RBI is expected to cut rates by 0.25% when it meets the week after next."

Banks have been demanding the lowering of the deposit rates on the small savings schemes so that they can reduce their deposit rates and further reduce their lending rates. Banks have been saying that it is difficult for them to reduce their rates fearing a flight of deposits out of the banking system.

Bank of America Merrill Lynch said in a report that they also expect a cut in lending rates when the RBI unveils its monetary policy. The fall in 10-year bond yields is a precondition for lower lending rates, it said in a report, adding that it expects RBI to cut rates in two tranches the first one of 0.25% in April and another tranche of 0.25% in August.