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RBI eyes deregulation of interest rate on savings accounts

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(The views expressed in this column are the author’s own and do not represent those of Reuters)

The RBI is keen to deregulate the interest rate on savings bank accounts and complete the marketisation of banking. But the banks which generally support deregulation insist that the RBI continue with control. What they are worried about is that deregulation would plug their cheapest source of funds.

Interest rates, whether on deposits or on credit, were deregulated as part of the reform process. Consequently, rates dropped dramatically and became a strong incentive for consumption, investment and growth. The only rate that is still governed by the RBI is the rate on savings deposits, apart from the policy rates like the repo rate or the bank rate.

The rate as also the method of calculation of interest payment on savings deposits had benefitted the banks unduly. It was only in April 2010, after about seven years of indifference, that the RBI gave some thought to the undue advantage the banks enjoyed with the low rate of interest and the wrong method of calculation.  With the change, the savings deposit became more like short term lending by the depositor to the bank.

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