RBI May Allow Banks to fix Savings Bank Interest Rate

Here are some news articles on the subject:

From Deccan Chronicle :

RBI mulls rate war for saving accounts

June 17: You may soon be earning more on your savings bank accounts. India’s banking regulator, Reserve Bank of India, is in favour of deregulating all interest rates, including savings bank deposit rates. Currently, the interest rate on savings account is 3.5 per cent. If it is deregulated, banks may be able to raise it based on their cost structure and funding needs. This would raise the cost structure for all banks, but those where savings accounts form a higher fraction of the total deposit base would see a greater impact.

“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,” RBI deputy governor, Mr K.C. Chakrabarty, said on Thursday. “But the decision will be taken, when to do that, after having adequate debate on the issue,” he added.

Currently, interest rate on savings bank is the only rate that the RBI regulates. Bankers say that deregulation of savings rate may take a long time to implement. However, this would raise competition amongst banks and push rates higher.

Analysts say that given the competition within the banking sector, savings rates could easily move up by 0.5-1 percentage point. “The upper limit to savings account interest rates is the repo rate — the rate at which banks can borrow money from the RBI,” says an analyst tracking the sector. Reacting to this statement, Punjab National Bank chairman, Mr K.R. Kamath said in Hyderabad that the deregulation will increase competition amo-ng banks to attract savings accounts, pushing up interest rates offered on such deposits. He, however, said that rate won’t go up drastically.

The repo rate currently stands at 5.5 per cent. However, drastic increases are unlikely because banks will not be able to raise lending rates alongside. Earlier this year, RBI had also asked banks to start calculating interest on savings account on a daily basis instead of weekly.

Interest rates on fixed deposits are not regulated by RBI, and different banks offer differing rates based on their cost of funds. For instance, State Bank of India offers an interest rate of six per cent on fixed deposits. For a private sector bank such as ICICI, this rate ranges from 6.25 to 6.75 per cent. For some of the smaller banks, such as Karnataka Bank, this rate goes up to seven per cent. A similar differentiation could creep up in case of savings rates.

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From The Hindu Business Line :

Savings bank deposit rates may be freed

Mumbai, June 17
Deregulation of savings bank deposit rate, the only rate that is currently fully administered, is on the cards.
Dr K.C. Chakrabarty, Deputy Governor, Reserve Bank of India, said on Thursday, “we are in favour of deregulating all interest rates, including savings bank. The direction is very clear. But, the decision will be taken after having adequate debate on the issue.”
Interest rates in India have been largely deregulated except for savings deposit accounts, non-resident Indian (NRI) deposits, and export credit. When asked if there would be wide variation in the interest rates on savings bank deposits across banks, Dr Chakrabarty said he did not expect the savings bank rate to move in a wide range after the deregulation. Currently, all banks pay 3.5 per cent interest on savings bank deposits.
‘Matter of time'
“This is a highly competitive market. Prices do not vary much. But what will be the rate, what customers will get, will depend on market conditions,” he said on the sidelines of a banking summit.
Dr C. Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister, too favoured dismantling of the administered interest rate structure. The deregulation in savings deposit rates was just a matter of time, he said on the sidelines of a seminar.
Deregulation will facilitate better asset-liability management for banks and competitive pricing will benefit holders of savings accounts, say bankers.
Savings bank account is the most common operating account for individuals and others for non-commercial transactions. It helps people to put through day-to-day banking transactions besides earning 3.5 per cent return on the savings made. Banks generally put some ceiling on the total number of withdrawals permitted during specific time periods. Banks also stipulate certain minimum balance to be maintained in savings accounts. The Deputy Governor said the sequencing of interest rate deregulation has been an important component of the reform process which has imparted greater efficiency in resource allocation.
In recent times, one of the important reform measures initiated by the RBI was on the savings bank deposit front. It has stipulated that banks should pay interest on a daily product basis with effect from April 1. Until then, interest on savings bank accounts was calculated on the minimum balances held during the period from the 10th day to the last day of each calendar month. This resulted in depositors earning much less than the prescribed 3.5 per cent interest on their savings.