The Reserve Bank of India, the country’s central bank, today freed savings bank deposit rates, thus razing the last pillar of the regulated interest rate regime in the country.
“...banks are free to determine their savings bank deposit interest rate,” the RBI said while deregulating the interest rates that Indian banks pay their savings account customers, adding the change will come into force with immediate effect.
Analysts maintain that this move will lead to fiercer competition among the country’s banks and, therefore, higher interest rates to both locally based and non-resident Indian (NRI) account holders.
The savings rate stands at 4 per cent at present, which was last raised in May after remaining unchanged for eight years. For deposits up to Rs100,000 (Dh7,500) and irrespective of the amount in the account within this limit, a bank will have to offer a uniform interest rate.
For savings bank deposits over Rs100,000, a bank may provide differential rates of interest, if it chooses to do so. “However, there should not be any discrimination from customer to customer on interest rates for similar amounts of deposits,” said RBI Governor Duvvuri Subbarao during the second quarter review of the apex bank's monetary policy for this fiscal.
The RBI had earlier given freedom to banks to determine fixed deposit rates, depending on their asset-liability positions.
According to RBI’s statement on India’s external debt NRI bank deposits as of June-end 2011 stood at $52.9 billion, accounting for 16.7 per cent of India’s total external debt of $317 billion. With the country’s banks already offering much higher interest rates than their overseas counterparts in the Middle East, the US and Europe, NRI deposits in India grew at a steady clip in the April-June 2011 period, growing by $1.2 billion, against $1.1 billion in the corresponding period last year.
Short-term NRI deposits (up to one year maturity) accounted for 82 per cent of the total NRI deposits during the first half of 2011, according to RBI data.
In addition, Indian overseas workers’ remittances were steady at $6.784 billion in Q2, 2011, against $6.414 billion in the corresponding quarter last year. With the Indian rupee plunging against the US dollar in the past few weeks, bankers maintain that Indian remittances may have gone up by as much as 8 to 10 per cent during the previous quarter.