India’s central bank RBI argues for interest rate deregulation on savings account deposits which currently carries interest rates of 3.5% and has not been changed since March 1, 2003. According to the discussion paper,
it is necessary that all rates move in tandem with the policy rates and the regulated savings rate has adversely affected the transmission of monetary policy. The RBI has not provided any time frame for the deregulation. Given the discussion paper’s release a week before the monetary policy and the debate on this in the past few months, we believe it might go in effect in the near future.
After De-Regulation where will Interest Rates Go ?
Interest rates on savings accounts will likely be determined by the interest rates cycle i.e below 3.5% in the low rate cycle and above
3.5% in high rate cycle. If it were deregulated now, the rate would likely settle closer to term deposit rates of 15 to 90 day maturities or around 4.5%-5% vs. the current 3.5%. In the long term, banks with large networks and strong franchises will likely attract more SA and pay lower rates on savings account vs. their smaller counterparts.
Impact of Free Savings Bank A/C Interest Rates on Banks:
The impact of the hike on banks’ margins could be negative unless: (1) banks pass on the higher cost to borrowers, (2) they charge higher fees for transactions, (3) require higher account balances, remove other free services that come along with such deposits.
RBI’s Bank Interest Rate…first effect to Real estate…than everything moving up/down.