Mumbai, April 16: The Reserve Bank of India (RBI) is likely to introduce a key reform when it unveils its monetary and credit policy on Tuesday. The savings bank rate, fixed by the central bank, may finally be de-controlled, allowing banks to determine this rate at their discretion.
Savings deposits which fetch an interest rate of 3.50 per cent are among the few instruments where rates are fixed by the central bank.
The RBI fixes the reverse repo/repo and bank rates, but these only have an indirect impact on a depositor.
In the past few years, the RBI has lifted various controls in the financial sector. For instance, banks have been allowed to fix loan rates.
According to bankers, the RBI has continued to administer the savings bank rate as it fears that lifting the control will lead to intense competition among banks to mop up deposits, thereby raising their cost of funds.
In 2003, the RBI brought down the interest rate on these deposits by 50 basis points to 3.50 per cent.
In 2000, it had reduced the rate to 4 per cent from 4.5 per cent. Interest on these deposits is paid half-yearly on the minimum balance between the tenth and the last day of a month, provided it is at least a rupee.
Though bankers are speculating on a decontrol for the last three years, this time they are optimistic that RBI governor Y.V. Reddy may finally bite the bullet.
“There is a strong case for decontrol of the savings bank deposit rate. Regulating the savings deposit rate is incongruous with the stated RBI policy of financial sector reforms,” said S.P. Prabhu of IDBI Capital.
“Banks are certainly more mature now. The RBI no longer worries about a scramble among banks to raise rates. Only the efficient ones will be able to offer a higher rate,” said a banker.
Moreover, it is the most appropriate time for the RBI to free up the rate.
The banking sector has just emerged from a liquidity crunch, and a rise in savings deposit rates may entice investors away from other instruments such as mutual fund schemes which offer better rates.
Most bankers do not expect the RBI to change interest rates. In January, the central bank had announced a 25-basis-point hike in reverse repo ' the rate at which it mops up funds from banks ' to 5.50 per cent.
Bankers and bond market players said the RBI would keep interest rates unchanged to prevent any pressure on the benign inflation rate which is floating at sub-four per cent levels .
“The liquidity situation has just improved. Reddy will not burden the banks with an interest rate hike this time around,” said Abheek Barua, chief economist with ABN AMRO Bank N.V.
Barua also does not expect a cut in the cash reserve ratio (CRR), though he said the central bank may raise the bank rate soon. While the bank rate now stands at 6 per cent, the CRR is at 5 per cent.
However, many believe that a “hawkish tone” will prevail in the policy statement.
“The RBI is likely to keep interest rates unchanged on April 18, but announce a hawkish statement hinting that it is not finished with monetary tightening,” said a recent JP Morgan report.