Interest rate cut on savings bank account will boost SBI's profitability, say analysts.

Highlights The lower interest rate applies to deposits below Rs 1 crore

Deposits above Rs 1 crore will continue to fetch 4% rate

SBI shares surged after the move

SBI has introduced a new two-tier savings account interest rate system from today (July 31, 2017), reducing interest rates for most of its depositors. On balances below Rs 1 crore, the interest rate has been brought down to 3.5 per cent from 4 per cent. On balances above Rs 1 crore, the bank will continue to offer 4 per cent. "The decline in the rate of inflation and high real interest rates are the primary considerations warranting a revision in the rate of interest on savings bank deposits," India's biggest bank said in a statement. Real interest rate refers to interest rate an investor receives after adjusting for inflation.



About 90 per cent of SBI's savings accounts have balances under Rs 1 crore.



Further, the bank said that it had cut the MCLR (marginal cost of funds based lending rate) or its key lending rate, by 90 basis points effective January 1, 2017, on the strength of large inflows in savings and current accounts after demonetisation. And there has been signification outflow of CASA (current account and savings account) deposits or low-cost deposits since then, it added.



The revision in savings bank rate would enable the bank to maintain MCLR or key lending rate at the existing rates, benefitting a large segment of retail borrowers in SME, agriculture and affordable housing segments.





SBI shares moved up by 3 per cent after the announcement. Analysts say that the reduction in savings bank deposits will help the lender's margins. Other banks are also expected to follow SBI's move and could cut the interest rate on savings bank deposits, analysts say.The Reserve Bank of India (RBI) is expected to cut interest rates when it meets on August 2 but an improving economy is likely to keep it on the sidelines for a long time thereafter, a Reuters poll showed. A significant moderation in retail inflation over the past three months has reinforced calls for further monetary policy easing from the central bank, which changed its stance to neutral from accommodative at the start of the year. (With Agency Inputs)