India frees banks to set own savings rates

MUMBAI: India's central bank on Tuesday announced the deregulation of interest rates on savings bank deposits, in a landmark decision seen as a key financial sector reform.

The Reserve Bank of India (RBI) said in a statement that banks were now "free to determine their savings bank deposit interest rate" in a decision that comes into force with immediate effect.

Until Tuesday, the central bank determined a fixed rate of interest on savings at all banks in India. The last rate was 4.0 percent.

But the RBI said banks would now be free to provide different rates of interest on deposits above 100,000 rupees ($1,980), although deposits below this amount would still attract a "uniform interest rate".

Modern banking systems across developed countries are largely free from central regulation of interest rates on savings and India's move is designed to attract more deposits, experts said.

Savings accounts are by far the most popular form of financial security for India's teeming millions, particularly in large cities and small towns.

Siddhartha Sanyal, chief India economist of Barclays Capital, welcomed the move, saying it signalled the end of the last regulated rates, making them linked to market forces.

Rohini Malkani, an analyst at Citibank, called the deregulation "a key step towards financial sector reform" that would help shore up savings.

The price of several bank shares, however, fell on concerns that the decision could raise the cost of their funds, even with intense competition in the fast-growing commercial banking sector.

Axis Bank, for example, fell 4.25 percent to 1,119.05 rupees on the Bombay Stock Exchange, while the state-run Bank of Baroda slid 2.3 percent to 719.35.

Copyright AFP (Agence France-Presse), 2011