Banks have received an estimated 14.9 trillion rupees ($219.30 billion) in old 500, and 1,000 rupees notes from depositors since the government on Nov. 8 unexpectedly banned the banknotes in a bid to fight counterfeiting and bring unaccounted cash to the economy.
That had raised expectations banks would have room to cut lending rates, which is seen as vital to increase credit growth and spark a revival in private investments.
Although India's gross domestic product grew 7.3 percent in the July-September quarter from a year earlier, the fastest pace of growth among large economies, much of that has been led by consumer demand.
Lower lending rates will be welcome by the Reserve Bank of India, which has cut the policy rate by 175 bps since the start of 2015 but has felt banks were being too slow in cutting their lending rates.
SBI's move comes after Prime Minister Narendra Modi on Saturday admonished banks to "keep the poor, the lower middle class, and the middle class at the focus of their activities," and to act with the "public interest" in mind.
Modi's comments were made in a special New Year's eve speech in which he defended his ban on higher-value cash notes and announced a slew of incentives including channelling more credit to the poor and the middle class.
Among others, state-run Punjab National Bank cut its MCLR rates by 70 basis points, Union Bank of India cut its MCLR rates by 65 to 90 basis points, while Dena Bank cut its one-year MCLR rate by 75 basis points. Private sector lender Kotak Mahindra Bank cut rates by up to 45 basis points.