State Bank of India on Tuesday took a “large step” to align its deposit and lending rates in the current rising interest rate regime.

India's largest bank upped its short-term (up to six months) deposits rates by 75 to 225 basis points.

The bank also raised the benchmark rates to which all its lending rates are linked by 75 basis points.

Higher EMIs

Following this, existing and new borrowers of SBI will have to pay higher EMIs on their loans.

The deposit and lending rate hikes are effective from May 12.

The rate hike follows the Reserve Bank of India raising by 50 basis points the repo and the savings bank rates last week. Repo rate, or the rate at which the RBI lends short-term funds to banks, now stands at 7.25 per cent.

With the savings bank rate moving up to 4 per cent, SBI had to increase short-term deposit rates. Else, savings deposits would have seen more inflows, thereby skewing the maturity pattern of its liabilities.

The highest interest rate hike of 225 basis points is for deposits of seven days to 14 days maturity from 4 per cent to 6.25 per cent.

With effect from May 12, the base rate and the BPLR will be 9.25 per cent (currently 8.50 per cent) and 14 per cent (13.25 per cent) respectively.

Benchmark ratesstill THE lowest

Even after the increase, SBI's benchmark lending rates are amongst the lowest in the banking sector due to its vast pool of current account and savings account deposits (CASA). Such deposits constitute about 45 per cent of its total deposits.

From July 1, 2010, banks have been lending at a spread over the base rate. Before this, they were lending with reference to the BPLR, at negative or positive spreads, depending on the customer.

The RBI directed that banks switch to the base rate system of loan pricing from the BPLR as lack of transparency in the latter hindered transmission of monetary policy signals.

Most of the banks such as Punjab National Bank, ICICI Bank, Bank of Baroda, Bank of India, IDBI Bank and Oriental Bank of Commerce have effected a 50 basis points hike in lending rates. Some of these banks also upped the short-term deposit rates.