Mumbai, Oct.25 (ANI): The Reserve Bank of India (RBI) on Tuesday announced that it would be deregulating the savings bank deposit interest rate with immediate effect.
The step means bank customers can expect to earn a higher rate on their savings bank deposits, which currently is at four percent. Analysts see interest rates on savings account to go up to at least six to seven per cent.
However, the RBI said that banks are free to determine their savings bank deposit interest rate, subject to two conditions.
Each bank will have to offer a uniform interest rate on savings bank deposits up to Rs. 1 lakh, irrespective of the amount in the account within this limit.
Secondly, for savings bank deposits over one lakh, a bank may provide differential rates of interest, if it so chooses.
However, there should not be any discrimination from customer to customer on interest rates for similar amount of deposit.
The RBI has also raised the Repo Rate by 0.25 per cent to tame inflation. This is the 13th rate hike in the last 18 months.
Savings deposits comprise 24 per cent of all the deposits in the country. About 86 per cent of this are held by households-the un-savviest of India's savers.
The Repo Rate (rate at which RBI lends to banks) now stands at 8.50 per cent. When the repo rate is raised, borrowing costs for banks become costlier. They in turn pass on the burden of rate hikes to their customers. All loans-personal and corporate- are likely to become costlier.
Home and car loan EMIs will increase, once banks hike their base rate - the rate to which most retail loans are pegged.
The Reverse Repo Rate, which is a per cent lower than the Repo Rate now stands at 7.50 per cent. The cash reserve ratio (CRR) - the amount of funds that the banks have to keep with RBI- remains unchanged at 6 per cent.
RBI Governor D Subbarao said that rate hikes may not be warranted beyond December.
Announcing the policy in Mumbai, Subbarao also said that it was necessary to persevere with anti-inflationary stance as the impact of past policy actions is still unfolding.
The policy aims to anchor inflationary expectations and there have been steps to reinforce emerging downward inflation trajectory , Subbarao added.
Since March 2010, the RBI has raised repo rate by a total of 375 basis points to 8.50 percent, but its effect is yet to be seen on inflation figures which have remained above expectations. Instead, the economy has lost its growth momentum with key data suggesting a slowdown in the medium term.
Taming inflation has remained a concern for the central bank. Inflation in September fell marginally to 9.72 per cent from 9.78 per cent a month ago. Headline inflation has remained above 9 per cent levels for the 10th straight month on supply side bottlenecks, high commodity and fuel prices.
Also, food inflation, which accounts for over 14 per cent in headline inflation, stood at a six month high of 10.60 per cent for the week ended October 8.
On Monday, the apex bank in its macro-economic review said that domestic price pressures still remain significant and broad-based.
"Food inflation is likely to stay elevated due to demand- -supply mismatches in non-cereals and large MSP revisions," it said adding real wage inflation has extended into first quarter of the fiscal.
The latest macro-economic review document says that the challenge is to bring down inflation. "Some sacrifice of growth is inevitable in the current milieu of high inflation," the central bank said.
The central bank in the recent past said that high inflation is likely to persist in the next couple of months before moderating as falling global commodity prices so far have been offset by rupee depreciation.
A series of dismal economic data has also led to belief that the industrial activity is slowing due to paucity of funds.
In the first quarter of this fiscal, the economy grew at 7.7 per cent, down from 7.8 per cent in the last quarter. This is the slowest pace of GDP (gross domestic product) growth in the last six quarters.
A weak rupee has also added to the inflationary pressure as it pushes up the landed cost of imported commodities. India depends on imports to meet 80 per cent of its crude oil requirement. It also imports a large quantity of vegetable oils and pulses.
Even the Centre has said that the RBI rate hike has led to slowing of the economy.
Finance minister Pranab Mukherjee on September 16 admitted that there have been signs of growth being affected by monetary tightening in the recent data of the real economy. (ANI with inputs from NDTV)
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