After a gap of 19 years savings account rate hiked 50bps to 4%

Coming after a gap of 19 years, the 50-basis points hike in savings rate announced by the RBI will benefit savers while nudging banks towards a consensus for its deregulation. It is expected to increase banks? cost of funds by about 14 basis points and put pressure on net interest margins of the banks.

The RBI has decided to increase the savings bank rate to 4% from 3.5%. ?The decision to raise the regulated rate on savings deposits by 50-bps adds to the tone of monetary tightening. It could impact cost of deposits by up to 14 bps, largely for new banks,? said Anand Shanbhag, executive director & research head, Avendus Capital. Union Bank of India CMD MV Nair said on Tuesday that banks? costs could rise 10-12 bps due to savings rate hike.

The savings bank rate has been reduced by 150 basis points in the last 15 years, by 50 bps each in 1994, 2000 and 2003. It was last raised in April 1992. The 50 bps hike is expected to raise banks? interest costs by about R6,000 crore on their savings deposit base of over R1 lakh crore .

?The increase in savings interest rate was a surprise and is expected to have a marginal impact on the net interest margins of banks. They may pass it on to the consumers in due course of time,? said Dipen Shah, senior VP, Kotak Securities.

Unlike term deposits, the interest rate on savings bank account are still regulated, and the RBI has put out a discussion paper for deregulating it. The RBI said in the discussion paper that the deregulation of these rates would allow banks to introduce product innovations which could benefit the depositors. But banks have opposed any move for deregulation, arguing it could lead to undue competition and a rate war.

?Pending a final decision on that, we have decided to increase the savings bank deposit interest rates from the present 3.5% to 4% with immediate effect,? RBI governor D Subbarao said while unveiling the annual credit policy for 2011-12.

The RBI last April mandated banks to calculate payment of interest on savings bank accounts on a daily basis, as opposed to the earlier system of calculating it on the minimum balances held in accounts between the 10th and last day of each calendar month. This roughly raised banks? interest payout by around R7,100 crore. The latest move would further benefit savers.