In a move that could bring cheer to bank depositors, the Reserve Bank of India on Tuesday announced deregulation of the interest rate on savings bank deposits with immediate effect. In its second quarter review of the monetary policy for 2011-12, the RBI also upped the short-term interest rate at which it lends (repo rate) to banks from 8.25 per cent to 8.50 per cent to curb persistent inflation, which continues to be above its comfort zone.

In the run-up to the deregulation of savings bank rates, the central bank had directed banks to pay interest on these deposits on a daily product basis with effect from April 1, 2010. Banks currently pay 4 per cent on SB deposits.

The RBI said that henceforth each bank will have to offer a uniform interest rate on SB deposits up to Rs 1 lakh. In the case of SB deposits over Rs 1 lakh, banks may provide differential rates of interest.

YES Bank responded to the RBI deregulation move by increasing the interest rate on all SB deposits by 200 basis points (1 per cent change is equal to 100 basis points) to 6 per cent. The bank also upped the Base Rate (the minimum lending rate) by 25 basis points to 10.5 per cent.

“Most banks are not in a hurry to hike the interest rates on SB deposits as liquidity is comfortable. So they would not be very keen or desperate to raise the rates and lose the cost advantage. In any case, depositors looking for higher yields have moved into fixed deposits or into liquid mutual funds,” said Mr Pratip Chaudhuri, Chairman, State Bank of India.

Repo rate hike

Even as it upped the repo rate, the RBI held out the hope that the current cycle of monetary tightening may be coming to an end.

Immediate transmission of the repo rate hike to lending and deposit rates is unlikely, say bankers. They fear that raising lending rates further could jeopardise credit growth.

“Our compulsion to raise the lending rates would happen only if deposit costs go up. As of today, all the banks are seeing good inflow of retail deposits and liquidity is plentiful. And credit demand is not very strong. So, if deposit costs don't go up, there is no immediate need to raise lending rates,'' said Mr Chaudhuri.

“Changing the policy stance when inflation is still far above the tolerance level entails risks to the credibility of the RBI's commitment to low and stable inflation. However, growth risks are undoubtedly significant in the current scenario, and these need to be given due consideration,” the Governor, Dr D. Subbarao, said at a press meet.

Pointing out that the year-on-year headline wholesale price index based inflation has remained stubbornly high during the financial year so far, averaging 9.6 per cent, the RBI expects high inflation levels to persist for two more months.

The likelihood of a rate action in the December mid-quarter review is relatively low due to the expected outcomes of inflation moderating to 7 per cent by March 2012 and even further in the first half of 2012-13.

Beyond December, if the inflation trajectory conforms to projections, further rate hikes may not be warranted, the RBI said.

GDP growth

The GDP growth projection for 2011-12 has been revised downwards from 8 per cent to 7.6 per cent.

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