Independent Research and Policy Advocacy

Response to RBI’s discussion paper on Deregulation of Savings Bank Deposit Rate

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We think that the Indian economy is ripe for deregulation of savings rate. The recent monetary policy released by the RBI highlights that the Indian economy may experience a slow growth over this year, given an inflation focused tightening of the monetary policy. Given the tight liquidity position in the market, and the inflationary pressures, this market is suitable for deregulation from the depositors’ perspective. With repo rate at 7.25%, there is a 3.25% spread between the repo rate and the savings bank deposit rate, and this will ensure that the risk of deposit rates falling below the current levels is minimised. Also, the current liquidity situation will require banks to actively compete with each other for retaining their deposits and attracting more deposits. And with new bank licenses to be issued shortly, the competition will ensure that the clients get overall better deals from banks. This has been the observation from international experience as well. Since banks will be pressured from liability as well as asset sides, they will have to improve their efficiency to stay competitive.

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