After rising for more than a year, short-term interest rates have started falling since the beginning of the month, thanks to improved liquidity.
Banks have started offering lower rates to corporate clients for short-term loans.
Banks' borrowing from the liquidity adjustment facility of the Reserve Bank of India fell sharply in July as compared to June.
While the average daily borrowing in June was Rs 74,000 crore (Rs 740 billion), it was only Rs 20,000 crore (Rs 200 billion) in July, indicating that most large banks have adequate funds.
As a result, though banks have increased their base rates, they are settling for thinner margins while deploying funds.
"If we park our funds in money market instruments, we will not get more than 7.5-7.6 per cent.
"Giving loans to companies for the short term, that is, for 30 days or 60 days, even at the base rate, will fetch more," said an executive director of a large public sector bank.
Most public sector banks have increased base rates by 25 basis points since the beginning of the month.
At present, the base rate of major public sector banks is 10.25 per cent, except State Bank of India, whose base rate is 9.5 per cent.
Base rates -- the benchmark for loans -- have risen by 200-225
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