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April 25, 2002 | 0910 IST
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Savings deposit rate cut likely

BS Banking Bureau

The Reserve Bank of India is likely to cut the interest rate on savings deposits by half a percentage point to 3.5 per cent in the forthcoming credit policy.

The central bank may even allow banks to offer lower interest rates on savings deposits by fixing a cap of 3.5 per cent but is unlikely to free the rate completely.

The RBI last cut the savings deposit rate by 50 basis points in April 2000 to 4 per cent. The post office savings rate is now pegged at 3.5 per cent.

The savings deposit rate is the last relic of the administered regime in the financial system.

Over the last few years, the RBI has freed all deposit and lending rates except the savings deposit rate. Even the export finance rate, which was administered till recently, has been partially freed as the RBI has capped it at below 2.5 per cent of the prime lending rates of banks.

The move to cut the savings deposit rate follows Finance Minister Yashwant Sinha's Budget announcement on freeing small savings rates and linking them to the government paper yields in accordance with the recommendations of the Y V Reddy committee.

However, public sector bankers are opposing any move to free the savings deposit rate as they feel that freeing it may result in a rate war, leading to increase in the cost of deposits, something that will end up hurting some of the banks.

"The bulk of savings deposits is mopped up in the metros and urban centres. The freeing of deposits will trigger a fierce rate war and the foreign and new private banks may start offering higher rates.

"These banks depend on borrowing from the call money market. By offering higher rates, they can snatch deposits from the public sector banks," pointed out a senior banker.

"There could be pockets of regulations even in a liberalised era if that is good for the system. Any move to free the savings deposit rate could be suicidal at this juncture," said a public sector bank chairman.

Even though the rate is now pegged at 4 per cent, the actual cost of savings deposits is far less for the banking system.

Unlike term deposits, in case of savings deposits the interest rates are paid only on the minimum balances held in the account between the 10th day and the end of the month.

The overall cost of savings deposits is around 3 per cent. This is the cheapest source of money for banks, beside current account deposits.

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