Happy Deepavali from RBI – Deregulation of SB Interest Rates

RBI has deregulated the Savings Bank Interest Rates (read here). I see this announcement as a Deepavali gift to the larger depositor base. While the focus of the media & public has been on the rate hike which will impact the borrowers, deregulation of SB A/c interest rates will benefit a much larger population.

Now what is this Deregulation all about?
Till now, the interest rates on savings bank a/c was fixed by RBI. It was reviewed occasionally (about once a decade) to adjust to the prevailing rates. The current rate of 4% was set in May this year. Previously for about a decade the rates were at 3.5%.

Now RBI has allowed banks to fix the interest rates themselves subject to the following 2 conditions:
a) Up to Rs.1 Lakh – irrespective of the type of SB A/c – the interest rate has to be same.
b) Banks can offer differential rates for money higher than Rs.1 Lakh ensuring that every customer keeping the same amount gets the same interest rate.

Now, how will this benefit a larger population?
Many people tend to park their money in SB A/c itself and not move to other investment options. Till date given the low interest rates & higher inflation, this money was actually depreciating.

Now banks that have lower share of CASA (current a/c, savings a/c) will be motivated to increase their deposit rates to attract customers. Similar to FD rates, now you can see SB rates differing between banks. (YES BANK has already announced 6% interest rate for SB A/cs)

Also, now banks may be able to give higher rates for higher deposits and attract more money into SB A/cs. Expect new offers from small banks.

a) Don’t expect rates to jump very high.
b) Not all banks may opt for higher rates, esp. big banks may not do it at all
c) Calculation of interest rate today is on a daily basis, but like Economic Times says if banks pay the higher rate based on avg. balance then it may not be beneficial (read here) (My personal opinion is that banks will still pay interest on daily balance basis, but eligibility may be decided based on the avb. balance maintained – this will increase the product complexity)