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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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