HDFC Bank, India’s largest private sector lender, has reduced its Marginal Cost of Funds-based Lending Rate (MCLR) by 5 basis points (one basis point is 0.01%). This decision, effective from August 7, makes HDFC Bank one of the first major banks to lower loan rates recently. While other banks are struggling with high costs, HDFC Bank is passing on the benefits of cheaper funding to its customers.

Under the new rate structure, the overnight and one-month MCLR have dropped to 8.00%. The three-month rate is now 8.15%, and the six-month rate stands at 8.30%. The very important one-year MCLR, which is the benchmark (standard reference) for many consumer loans like personal or auto loans, has been cut to 8.40%. Long-term borrowers will see the three-year MCLR at 8.65%, though the two-year rate remains steady at 8.55%.

Why did the bank cut rates when others are not? Experts say the bank is getting cheaper money from abroad. HDFC Bank collected about $1.4 billion through Foreign Currency Non-Resident [FCNR(B)] deposits (special accounts for NRIs to keep money in foreign currency) by the end of July. These foreign deposits are much cheaper for the bank compared to domestic term deposits (fixed deposits) usually offered to Indian residents.

Another reason is the repricing of the deposit book. As old, high-interest deposits mature (reach their end date), the bank replaces them with new funds at better rates. Even though HDFC Bank hasn't officially changed its fixed deposit rates for a few months, the natural cycle of maturing deposits has helped lower the overall cost of funds (the total interest expense a bank pays to get money).

This move by HDFC Bank is the opposite of what other banks are doing. For example, Bank of India recently raised its one-year MCLR to 8.80%. State Bank of India (SBI) has kept its rates unchanged at 8.70% since June. By cutting rates, HDFC Bank is positioning itself aggressively against competitors like ICICI Bank to win over more corporate borrowers who look for the lowest interest rates.

For bank officers and aspirants, this is a key lesson in Treasury Management (managing a bank's money and risks). It shows how a bank’s ability to raise cheap funds from international markets can give it a huge advantage in the local lending market. When a bank lowers its cost of funds, it can offer cheaper loans, which helps attract more customers and grow the loan book.

Looking ahead, the industry will watch if other private and public sector banks follow HDFC Bank’s lead. If more banks see strong inflows of cheaper deposits, we might see a broader trend of falling interest rates. For now, HDFC Bank’s move suggests they are comfortable with their liquidity (cash availability) and are ready to compete hard for new loan business.