The Central Bank requested licensed banks and Non-Bank Financial Institutions (NBFIs) to reduce interest rates on deposits with effect from April 29, 2019.
This measure was taken to accelerate monetary policy transmission through the financial sector, enabling licensed banks to reduce their interest rates on lending products in general, and to SMEs in particular, and thereby enhance credit flows to the real economy. Accordingly, interest rates on savings and other deposits with tenures less than 3 months offered by licensed banks and NBFIs were based on the Standing Deposit Facility Rate (SDFR) whilst longer tenures were based on the 364 day Treasury bill rate. The Central Bank has also injected substantial rupee liquidity to the domestic market by reducing the Statutory Reserve Ratio (SRR). It has also further reduced the policy interest rates by 50 basis points on May 31, 2019 which is directly reflected in the corresponding reduction in SDFR-linked interest rates of savings deposits.
Commencing July 1, 2019, the Central Bank further revised the reference rates applicable on deposits of banks and NBFIs for the 03rd quarter of 2019, and the maximum interest rates that can be offered on savings and fixed deposits have reduced further by 50 basis points and 171 basis points, respectively, thereby reducing the cost of funds of banks and NBFIs. The Average Weighted Prime Lending Rate of licensed commercial banks has also reduced by 127 basis points from 12.24% as at April 26, 2019 to 10.97% as at July12, 2019.
Accordingly, the Central Bank expects lending rates of banks and NBFIs to reduce further in the immediate future, and borrowers, particularly SMEs, can expect to obtain credit facilities at reduced interest rates from banks and NBFIs. The Central Bank will closely monitor the behaviour of bank interest rates and take further measures as appropriate in future to support economic growth given well contained inflationary pressures.
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