This is the first time in recent years that the country's central bank has sought senior bankers' views on freeing the savings deposit rate-the last relic of the regulated regime. It has already freed all lending rates and term deposit rates of 15 days and above. "Some of the bankers have been asked to present papers on the subject," RBI sources said.

So far the central bank has cautiously avoided the subject--despite strong lobbying by certain quarters for deregulating savings deposit rates--on the ground that it would push up banks' cost of deposits as competitionwill force banks to offer higher rates. At present, the interest rate on savings accounts is pegged at 4.5 per cent.

A few bankers, when contacted by The Financial Express, said that the freeing of savings deposit rates was inevitable and it was up to banks to manage the cost of deposits. "It may not be announced in the forthcoming busy season credit policy but the fact that the central bank is discussing the issue with bankers is significant," said a banking sector analyst.

Bankers are divided on the possible impact of the freeing of savings deposit rates. While some of the new private sector banks feel that the rate may go up in the short term only to stabilise later, a leading public sector banker said the rates may not really go up as savings deposits may merely be treated as current accounts (which offers no interest).

"The saving deposit rate should be freed at the earliest and banks may initially offer a higher rate to ward off the threat of mutual funds. However, the interest rate willstabilise in the medium term," said a senior executive of a new private sector bank. Incidentally, mutual funds mopped up Rs 7,376 crore in April-August 1999, up from Rs 2,295 collected in the first half of the last fiscal. Bank deposit growth in April-August was to the tune of Rs 26,692 crore, down from Rs 30,139 crore mopped up in the corresponding period of the last year.

The RBI discussion on freeing savings bank deposit rates is in line with its focus on financial sector deregulation. Earlier this month, it had asked the Indian Banks' Association to stop issuing guidelines on service charges.

The Foreign Exchange Dealers' Association has also been asked not to dictate charges on forex transactions. "The interest rate on savings deposits may not go up as deposits of 15 days and above have already been freed and banks are offering competitive rates on short-term deposits. In a deregulated regime, banks will treat the savings deposit as current account and pay minimum interest rates since thosedepositors who want a higher rate can lock in funds for at least 15 days," a senior State Bank of India official said. On an average, savings deposits account for close to 25 per cent of total bank deposits.