WEALTH

RBI hikes savings deposit rate by half a per cent

Good news! The interest rate on your savings bank deposits are set to rise marginally as the Reserve Bank of India has raised interest rates on savings deposits to 4 per cent from 3.5 per cent earlier.
Announcing the Annual Monetary Policy, RBI also hiked key bank rates, read repo and reverse repo, by half a point, making loans costlier.

RBI governer D Subbarao said the hike in the rate of interest from savings bank account will come into effect immediately. The move is likely to benefit million of account holders earning them more on their savings accounts.

In a draft paper released last week, the central bank had advocated deregulation of savings bank rates for banks. The saving deposit rate is the last of regulated interest rate in practice in the Indian banking system.

However, banks do not quite subscribe to the view and banking leader SBI is opposing the move strongly.

SBI chairman Pratip Chaudhuri has opposed deregulation of bank savings rates, but said there should be adequate incentives for saving bank deposits.

“We are not in favour of deregulation, but adequate incentives for saving bank deposits. We will go along with whatever the Reserve Bank of India prescribes,” he said.

RBI says while deregulation of interest rate on savings deposits will benefit savers, it would also enable lenders to come out with innovative products to attract more funds from low income households.

RBI deregulated interest rates on fixed deposit schemes in 1997, but it continues to fix the rate on savings deposits. Till date, banks were paying interest at the rate of 3.5 per cent on saving accounts, which was last fixed in 2003.

RBI has said regulating the rate does not help savers, as about 90 per cent of them use these accounts to earn an interest income. In a discussion paper released on Thursday, RBI said regulation of the savings rate has adversely impacted monetary transmission. The savings rate is now fixed at 3.5 per cent.

“As the administered savings deposit interest rate has not moved in sync with the changing market conditions, it has generally been unfavourable to sa­vers. For transmission of monetary policy to be effective, it is necessary that all rates move in tandem with the policy rates. This process, however, is impeded if the interest rate in any segment is regulated,” RBI said in the paper.

Public sector banks which enjoy huge savings account deposits do not want deregulation. They say it will create confusion in the market and unhealthy competition from private banks which may lure away customers in the short term with higher rates of interest.

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