Interest Rate Regulation

India has pursued financial sector reforms as a part of structural reforms initiated in the early 1990s. A major component of the financial sector reform process was deregulation of a complex structure of deposit and lending interest rates. The administered interest rate structure proved to be inefficient. It, therefore, became necessary to reform the interest rate structure. The RBI paper notes that savings deposits are a popular product and they constitute about 22 per cent of total deposits of scheduled commercial banks and about 13 per cent of financial savings of the household sector. On balance, it is felt that the time is appropriate to move forward and complete the process of deregulation of rupee interest rates. Now the banks are free to determine their savings bank deposit interest rate, subject to the following two conditions:

  • First, 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.
  • Second, for savings bank deposits over Rs. 1 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 deregulation of savings deposit interest rate will benefit depositors by providing them with wider banking options and by increasing interest income by around Rs.90 billion.
  • This will intensify competition among banks and the efficiency factor would be enhanced at the functioning of the banks and more professionalism would be seen. Small and medium-sized banks, which are trying to increase their retail deposits base, are likely to be the first movers in increasing the interest rates. It will lead to product innovations.
  • Deregulation of interest rates was intended to strengthen the competitive forces, improve allocative efficiency of resources and strengthen the transmission of monetary policy.
  • The main benefit of removing the shackles from savings bank will result in better monetary policy transmission–as banks will promptly revise lending and deposit rates in tandem with the central bank’s rate moves.
  • Since savings deposit is a hybrid product, which combines the features of current account and term deposit, a market-based rate of interest on this product has the potential to attract large savings from low-income households.


  • The negative point is whether banks are going to abandon the interest of low income household, which goes against the financial inclusion. If it fluctuates, it will affect the financial plans of pensioners.
  • There is more risk of asset-liability mismatch.
  • It will lead to unhealthy competition amongst the banks and at the same time the smaller banks would have asymmetric advantages in relation to bigger banks.
  • Most banks tend to boost the proportion of CASA (current account-savings account) deposits within their overall deposit structure because of a simple precept: the higher the CASA ratio, the cheaper the cost of funds for the bank.
  • It could also lead to financial exclusion as banks would no longer have any incentive to push the no-frills account scheme to small savers in rural areas – jeopardizing the existing economic policies of the government.

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