Boosting Savings Deposit Rates: RBI’s Push Amidst Lender Reluctance


In the ever-evolving financial landscape of India, the nation’s central bank is determined to empower account holders with the fruits of higher interest rates. The Reserve Bank of India (RBI) is advocating for an upward revision of savings deposit rates, but it appears that banks, with an eye on fortifying their profit margins, are not embracing the idea with open arms, according to multiple sources within the banking sector.

The Significance of Savings Accounts

Savings accounts, a staple in the Indian banking industry, are popular among depositors due to their liquidity and accessibility. These accounts, often the first step in financial inclusion, constitute roughly one-third of the total deposits in Indian banks. Despite their significance, the interest rates offered on these accounts have been a point of concern, particularly for the RBI.

RBI’s Endeavor for Monetary Policy Transmission

Over the past fiscal year, the RBI has hiked the policy repo rate by a substantial 250 basis points, bringing it to 6.50%. The primary aim behind this move is to ensure a more comprehensive transmission of monetary policy. An undisclosed source familiar with the RBI’s perspective stated, “A significant portion of interest rate transmission has occurred through external benchmark lending rates. However, a smaller portion still lingers due to the persistently low savings deposit rates.”

The Banks’ Perspective

Public sector banks typically offer interest rates ranging from 2.70% to 4% on savings deposits, while larger private banks provide rates in the range of 3% to 4.50%. However, the concerns raised by banks are not without merit. One high-ranking official at a private sector bank emphasized, “The operational and technological costs associated with maintaining savings accounts are notably high. Even a modest increase of 20 to 25 basis points would have a ripple effect across the entire spectrum of lenders.”

Potential Margin Impact

Moreover, these rate hikes could potentially erode the profit margins of banks, making it a contentious issue for the lending institutions. The anonymous official further stated, “This could indeed prove to be margin-dilutive at this juncture.”

RBI’s Assessment

In a monetary policy report, the RBI pointed out a glaring disparity. While the increase in term deposit rates during the current phase of monetary tightening has outpaced the increase in lending rates, savings deposit rates have remained almost static. This phenomenon has served to moderate the overall cost of funds for banks, contributing to higher net interest margins.

Lender Resistance

Despite the RBI’s persistent encouragement, certain lenders remain resistant to the idea of raising savings deposit rates. Notable institutions such as YES Bank (YESB.NS), Kotak Mahindra Bank (KTKM.NS), and IndusInd Bank (INBK.NS) have openly stated that they currently have no intentions to implement such rate increases.

In conclusion, the RBI’s efforts to nudge banks towards enhancing savings deposit rates are met with resistance, as lenders weigh the potential impact on their operational costs and profit margins. The central bank’s aim to ensure a more complete transmission of monetary policy will likely continue to be a point of discussion in India’s financial sector. The balance between providing favorable rates to account holders and maintaining the profitability of banks remains a crucial challenge in this evolving landscape.

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