Discussion paper on deregulation of savings rate by Dec: RBI

Mumbai: In a step towards full autonomy for banks, the Reserve Bank of India (RBI) today said it might deregulate interest rates on savings bank deposits below Rs2 lakh and invited comments from stakeholders on the proposal, reports PTI.

The interest rate on savings bank deposits has remained unchanged at 3.5% per annum since 1 March 2003, RBI said in its mid-term review of credit policy today.

Keeping in view the progressive deregulation of interest rates, it is proposed to prepare a discussion paper, which will delineate the pros and cons of deregulating savings bank deposits interest rates, it said.

The discussion paper will be placed on the RBI's website by end-December 2010 for feedback from the general public, it said.

Presently, the savings rate is fixed at 3.5% and is calculated on a daily basis from 1st April. However, banks can fix the rate on deposits over Rs2 lakh even today.

It is to be noted that RBI does not regulate the fixed deposit rates of banks.

The RBI also noted that there is moderation in growth in bank deposits, particularly long-term deposits.

"A contributory factor to this trend has been negative real interest rates on deposits, which have induced depositors to both hold currency and invest in non-financial assets, including gold and real estate, whose prices have shown significant increases over the course of the current year," it said.

Earlier, RBI governor D Subbarao had said "deregulation of interest rates (including savings rates) is an important way forward for reforms. The base rate system that would come in to affect from July 1 is also an important reform method."

The concerns expressed by banks on the issue should be debated, he had said.

From July this year, Indian banks switched to a new base rate mechanism as per the RBI direction, replacing the Benchmark Prime Lending Rate (BPLR).

According to a banker, deregulation of savings bank deposit could push rates, as banks with low CASA (Current Account and Savings Account) would try to attract depositors by offering higher rates.

This could result in flight of CASA from higher to lower ratio banks, he said on condition of anonymity.

Mobilising CASA is a cheaper way of raising resources compared to fixed deposits and bulk deposits. The higher the CASA, the lower the cost of funds for the bank.


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Rising asset prices a concern: RBI

Mumbai: The Reserve Bank of India (RBI) today expressed concerns at galloping rise in prices of shares in stock markets, gold and property, but refrained from saying whether there is asset bubble in the economy, reports PTI.

"Although the income levels of households and earnings of corporates in India have continued to rise, a sharp rise in asset prices in such a short time causes concern," RBI said in its second quarter monetary policy review.

It said excessive global liquidity and higher market returns is bringing in more foreign capital into the country, which is leading the equity market close to its peak.

Benchmark equity index Sensex has already crossed 20,000 points, just over 100 points shorter than all-time high of 21,207 it saw in January 2008.

On housing and gold prices also, RBI noted: "Residential property prices in metropolitan cities have gone beyond the pre-crisis level. Gold prices are ruling at an all-time high level."

Gold prices had touched a high of Rs20,120 per 10 grams on 15th October. Currently the price of the yellow metal is Rs19,800 per 10 grams.

The central bank said that huge capital inflows in the emerging market economies have resulted in appreciation in the domestic currency and accordingly a surge in asset prices.

To restrict the possibility of happening of an asset bubble, the RBI today asked banks to set aside more money for offering housing loans.

Expressing concern at rising asset prices, RBI capped housing loans to 80% of the value of the property, and raised risk weight on loans of at least Rs75 lakh.

The central bank upped risk weight on housing loans of Rs75 lakh and above to 125%. Thus, banks will now have to keep more money aside for giving housing loans. The current weight ranges from 50%-100%.

"Clearly RBI believes that there is a speculation going on in the property market and they want to curtail that. RBI has come heavily on the real estate sector. In larger cities like Delhi and Mumbai, there is too much euphoria going on, but same is not true in case of Tier II cities.

"In Delhi and Mumbai prices had dropped by 25% from the peak during recession. Now, it has again risen back to pre-crisis level or even more," global property consultant Jones Lang LaSalle Meghraj (JLLM) country head Anuj Puri said.


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