Mumbai, Oct. 3: A day ahead of the RBI's decision on policy rate, the State Bank of India (SBI) has reduced interest rates on short-term deposits.

The country's largest lender has cut the interest rate on term deposits of one year by 25 basis points and the revised rate will be effective from October 1.

Observers saw this as a show of one-upmanship by the SBI, sending a subtle cue to the central bank to cut policy rates tomorrow. The SBI had done a similar thing in August, ahead of the MPC review meeting when it had cut the savings bank rate with a balance of up to Rs 1 crore by 50 basis points to 3.5 per cent.

According to today's directive, the SBI will offer an interest rate of 6.50 per cent against an earlier rate of 6.75 per cent for the general public. For senior citizens, the rates have been brought down to 7 per cent from the earlier 7.25 per cent. Rates for other deposits have been left untouched.

The reduction comes days after the lender brought down its base rate by 5 basis points.

Late last month, the SBI had announced that its base rate, which was the earlier benchmark rate, would stand at 8.95 per cent.

Apart from the SBI, two other state-owned lenders -Bank of Baroda (BoB) and Andhra Bank - had also lowered their base rates.

The domestic banking system has shifted to the marginal cost of funds based lending rate since April last year.

However, some of their customers who have taken loans prior to April 2016 are yet to shift to the new mechanism and their flexible rate home loans continue to be determined by the base rate.

The deposit rate reduction by the SBI, albeit only in one tenor, comes at a time the RBI is widely expected to opt for a status-quo.

The six-member Monetary Policy Committee (MPC) began its two day meeting today and it is felt that the repo rate will be left unchanged at 6 per cent when the fourth bi-monthly monetary policy for 2017-18 is announced tomorrow.

In August, the SBI had said that the cut in savings bank rate was on the back of large inflows in savings and current accounts during the demonetisation period and that the decline in the rate of inflation, high real interest rates and the expected softening of rates were the other considerations warranting a revision.

Market circles do not rule out the possibility of other lenders also opting for more interest rate cuts in term deposits over the coming days given the comfortable liquidity in the banking system and poor credit offtake.