The Reserve Bank of India (RBI) is nudging banks to raise savings deposit rates in order to pass on the benefits of higher interest rates to account holders. However, banks are in reluctant mode to adopt this plan to enhance their profit margins.
While interest rates rose by over 250 basis points (bps) since May 2022 to 6.5% as part of the central bank’s aggressive stance to rein in rising inflation, savings deposit rates have remained relatively static, in contrast to the significant increase in borrowing rates.
Savings accounts offer lower interest rates, though they comprise a considerable portion of total bank deposits. The RBI is looking forward to banks raising these rates to facilitate a relatively more comprehensive transmission of monetary policy.
Although a major portion of interest rate transmission has occurred as a result of external benchmark lending rates, a small portion continues to remain due to low savings deposit rates.
While public sector banks offer savings deposit interest rates ranging anywhere from 2.7% to 4%, major private banks tend to offer rates between 3% and 4.5%.
A considerable amount of operational and technological costs is related to maintaining savings accounts; as a result, even the slightest increase of 20-25 bps could have a significant impact on lenders, maintain bank officials.
As per its monetary policy report, the apex bank noted that while term deposit rates have experienced a more considerable rise during the current tightening cycle compared to lending rates, savings deposit rates continue to remain mostly unchanged.
As a result, a moderate jump is seen in the overall cost of funds for banks and a surge in net interest margins, stated RBI in its report. The RBI has reportedly been urging banks at meetings to take into account raising the savings deposit rates, and it may push them once again if need be.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.