What is impact of Savings Bank Interest Rate hike on CASA ratio?
There was a recent hike in interest rates on Savings Banks from 3.5% to 4% after a period of 8 years. The first thing you must note that still in India, the interest rates on Savings Banks are NOT deregulated , though there are views on both pros and cons of deregulating the interest rates on Savings Bank Account.
In India, unlike the time deposits, the SB account interest rates are still regulated even as the central bank has put out a discussion paper for freeing the same. Interest rates on fixed deposit schemes were deregulated in 1997.
The hike from 3.5% to 4% on Savings Banks account would raise the cost of borrowing for the banks which leverage high on the ‘Current Account, Savings Account'(CASA) funds. This is because, CASA deposits are much cheaper than the time deposits, where the going rate for six-months and above is about eight per cent.