RBI deregulates saving rates
October 27, 2011

Upping the competition ante on state run bureaucratic Indian banks, the country’s central bank, the Reserve Bank of India today deregulated interest rates on savings accounts. A move that is expected to be a shot in the arm for small and medium banks as well as foreign banks that are vying for customer savings, will change banking in India significantly. The RBI’s move, which was announced at the conclusion of a quarterly monetary policy review. Encouraging saving and greater financial inclusion, these savings accounts, which total some Rs14,469bn across the entire banking system, are overwhelmingly held by millions of Indian households.

Until May, India’s largely state-owned banking sector had applied a universally fixed interest rate on savings deposits, which had stood at 4 percent for eight years, regardless of inflation running at near double digits. Commercial lending rates, by comparison, are as much as 13 per cent. Duvvuri Subbarao, central bank governor, said on Tuesday that the deregulation would begin immediately, and that across the sector “banks are free to determine their savings bank deposit interest rate”.

In a country which has long been known for its high savings rate in gold and real estate rather than in a bank account, expects the new policy to be a boost before the Diwali festival for depositors in a banking market that has long operated like a cartel. According to the deregulation, banks will now be allowed to compete with a single rate for depositors up to Rs100,000 (US$2,015) and tiered rates for deposits higher than that amount.

While many smaller banks like Yes Bank, Kotak Mahindra Bank and IndusInd Bank have revised their interest rates upwards, stalwart Public sector banks have remained adamant on their interest rates, secure in the fact that most people won’t change their banks over a few percentage points.

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