India's Central Bank proposal to Deregulate the Savings Deposit rate a Positive move

Introduction

India’s Central Bank RBI is proposing to free up the Savings Deposit Rate which is currently fixed at 3.5% . All banks whether they be private or public, have to offer 3.5% to savings account customers.This is the only rate which is administered by the Central Bank,fixed deposit rates and lending rates are decided by the banks themselves.Note India has a high inflation and a saving rate of 3.5% in fact results in a negative rate of return for saving account holders.Even the fixed deposit rates are not very high at 6-6.5% compared to the inflation which is running at 10%.Freeing up the savings rate will lead to better returns for the customers.India’s population is not very financially savvy and a lot of customer savings lie in the savings account serving as a cheap and stable funding source for India’s banks.In fact,one of the measures of valuation of the India banks is to look at the percentage of a bank’s deposits from this source.Higher the percentage better the Interest Earnings for the banks.

Positive Implications for Customers

India has a vibrant competitive banking sector with lots of private,public and foreign banks regulated quite intelligently by the RBI.In fact RBI is looked upon as one of the best run central banks globally, with India managing to almost completely evade the Global Financial Crisis.With the deregulation of the interest rates,it would make sense for a lot of banks with a high funding costs to lure customers with a higher savings rate than the current 3.5%.In fact a lot of private banks already offer saving schemes which automatically convert saving deposits to fixed rate deposits.This will led to more competition for the stable base of retail consumers leading to higher rates.Note lending rates are quite high in India with India’s 10 year bond yields generally trading in the 7-8% range.

RBI in favour of deregulating savings rate – Livemint

The Reserve Bank of India (RBI) is in favour of deregulating savings bank deposit rates of banks, RBI deputy governor K C Chakrabarty said on Thursday.“We have initiated a debate in the last policy…, the deduction is very clear, clear in favour of deregulating all interest rates, including savings bank. But the decision will be taken, when to do that, after having adequate debate on the issue,” Chakrabarty said on the sidelines of a banking event.He does not expect the savings bank rate to move in a wide range after the deregulation.