Although the government has slashed small savings deposit rates by up to 1.3%, bankers say they will decide on reducing interest rate on deposits and advances after the RBI monetary policy early next month.
The government yesterday cut deposit rates on host of small savings schemes, signalling banks to reduce their interest rates.
"There is possibility of rate cut by banks after changes made by the government on small savings rate but most of the banks would take a decision in this regard after RBI policy," Bank of Maharashtra Chairman and Managing Director Sushil Muhnot told PTI.
The Reserve Bank of India is scheduled to announce its first bi-monthly monetary policy for 2016-17 on April 5.
Another public sector bank chief, expressing similar opinion, said the government has finally heeded to the long pending demand.
The cut in interest rate on small savings scheme will prevent the flow of money from banks to post offices, helping effective monetary transmission, he added.
The government's move has also created space for RBI to reduce their policy rate, bankers said.
Interest rates were slashed on all small savings schemes, including PPF, Kisan Vikas Patra (KVP) and senior citizen deposits to make them more market aligned.
On one-year post office deposit scheme, rate has been reduced by 1.3% to 7.1% from existing 8.4%, while SBI is paying 7.25 per for fixed deposit between one year and 455 days.
Interest rate on Public Provident Fund (PPF) scheme has been cut to 8.1% for the period April 1 to June 30, from 8.7%, at present.
Similarly, the interest rate on KVP will be reduced to 7.8% from 8.7% while senior citizen savings scheme of five years would earn 8.6% interest compared with 9.3%.
Terming the decision slashing of interest rates as a "normal exercise of resetting" rates in March every year, Economic Affairs Secretary Shaktikanta Das had said, "this will enable banks to consequently reduce their deposit rates and extend loan and credit to public and borrowers at lower rates."
Even RBI Governor Raghuram Rajan had said the rate reduction on small savings like PPF and Post Office deposit is also going to bring down the cost of fund for banks.
The median base lending rates of banks have come down by about 70 basis points as against a 125 basis points of the policy rate reduction since January.