Banks led by State Bank of India [Get Quote] are set to lower deposit rates by over 50 basis points by the middle of the month, followed by a reduction in lending rates.

Banks look to first lower the deposit rates. It takes time for the cost of their funds to come down, while a reduction in lending rates immediately affects their income.

A senior SBI executive told Business Standard the country's largest bank, which lowered rates earlier this week, would review its interest rates following the latest round of monetary measures announced by the Reserve Bank of India.

"There could be a further 50-75 basis point cut in our interest rates. The decision could take place by the middle of this month. While this may reduce the cost of borrowing for the customer, the issue is improvement in credit off-take since industry is facing a demand slowdown," he added.

Taking a cue from RBI's actions, Syndicate Bank [Get Quote] today said that it would lower its benchmark prime lending rate by 75 basis points to 12.50 per cent from January 17. It will also cut its deposit rates by 25-75 basis points across maturities.

Private sector lender Bank of Rajasthan [Get Quote] also reduced rates on term deposits by 35-50 basis points.

Other banks are expected to follow suit. While HDFC Bank's [Get Quote] asset-liability committee is expected to decide over the next fortnight, an Axis Bank executive said home loan rates would be cut by 25-50 basis points over the next seven to 10 days. "Since we have among the healthiest current and savings account base in the industry, we have preferred to stay away from frequent revisions in rates. Our cost of funds is quite manageable now and we hope to reduce lending rates further," he said.

ICICI Bank [Get Quote] has also indicated that it will lower deposit rates by another 50 basis points though it did not say by when. "This reduction, coupled with the fiscal measures, is an excellent combination. Credit will flow much better to industry, particularly to auto and housing, as a result of these measures," said the bank's Executive Director V Vaidyanathan.

Vijaya Bank [Get Quote] executive director S C Kalia said the bank's asset-liability committee would take a call on lowering rates in a week. "RBI's decision will accelerate the process of reducing interest rates," he said.

On Friday, RBI lowered the repo and the reverse repo rates by 100 basis points each to their lowest levels ever, while the cash reserve ratio, or the proportion of deposits banks need to set aside, will be cut by 50 basis points to 5 per cent from the fortnight starting January 17.

This the fourth round of rate cuts by RBI since October, after the global credit crisis intensified. The moves are aimed at stepping up credit flow, with loan growth showing signs of a slowdown, and boost economic activity.