The Reserve Bank of India (RBI) is expected to cut the rate on savings deposits by half a percentage point. The savings bank rate, now at 4 per cent, is the last relic of the administered regime in the financial system.
The RBI last cut the savings rate by 50 basis points in April 2000. A clutch of public sector bankers, who met RBI deputy governor YV Reddy in the run-up to the credit policy announcement next month, made a strong pitch for continuing with the administered savings rate for the time being. Bankers felt that freeing the interest rate on savings deposits could trigger a fierce rate war, thereby raising the cost of funds for banks.
The average cost of savings bank deposits works out to around 2.5 per cent. This is the cheapest source of money for banks, beside current account deposits. If the savings deposit rate is freed, private sector banks may start paying higher rates, leaving the public sector banks with no choice but to follow suit.