As a part of financial sector reforms, the Reserve Bank has deregulated interest rates on deposits, other than savings bank deposits. The interest rate on savings bank deposits has remained unchanged at 3.5 per cent per annum since March 1, 2003. Keeping in view progressive deregulation of interest rates, it was proposed in the Second Quarter Review of Monetary Policy 2010-11 announced on November 2, 2010 to prepare a Discussion Paper to delineate the pros and cons of deregulating the savings bank deposits interest rate. It was proposed to place a Discussion Paper on the Reserve Bank’s website for feedback from general public.
Accordingly, this Discussion Paper is an attempt to deal with pros and cons of deregulating savings deposit interest rate and take on board the suggestions of various stakeholders for either maintaining the status quo or deregulating the savings deposit interest rate.
2. The Discussion Paper is organised as follows. Section II provides a historical account of deregulation of deposit interest rates in India. Section III analyses the trend in savings bank deposits in India. Section IV sketches out the international experiences with regard to the impact of deregulation of savings products in select countries. This is followed by a detailed analysis of pros and cons of deregulation of savings deposit interest rate in India in Section V.
Section VI presents an analytical perspective on some of the concerns raised by banks relating to deregulation of savings deposit interest rates. Section VII sums up the discussion and sets out some specific issues for feedback from general public.
Section II: A Historical Account of Deregulation of Deposit Interest Rates in India
3. India pursued financial sector reforms as a part of structural reforms initiated in the early 1990s. A major component of the financial sector reform process was deregulation of a complex structure of deposit and lending interest rates. The administered interest rate structure proved to be inefficient.
It, therefore, became necessary to reform the interest rate structure. Deregulation of interest rates was intended to strengthen the competitive forces, improve allocative efficiency of resources and strengthen the transmission of monetary policy.