The final destination

The Reserve Bank of India took savings interest rates in the banking sector to its final destination by announcing deregulation with immediate effect. We can only compliment the merits of deregulation that facilitates efficiency in allocation of resources and strengthens the transmission mechanism of monetary policy by allowing the entire term structure of interest rates to move in tandem with the policy rate.

As the Indian economy witnesses a rapid structural transformation, on the back of an increase in formal employment and a greater degree of financial intermediation, saving accounts penetration (a basic indicator of financial inclusion/ penetration of banking services) is set to witness a secular rise.

The increase in savings interest rates & the eventual deregulation of the same is a transformational positive step towards enhancing the rights of the small retail customer, who are typically not savvy enough to maximise the returns on small savings through FDs/investments and will greatly benefit through this alignment towards market based savings rates. The initial phase of deregulation may see some competition amongst banks manifesting in higher rates. However, as the system evolves we could see the savings rate stabilise and converge.

This phenomenon is akin to what was witnessed in Insurance, Airlines, Telecom and Pharmaceuticals sectors as they aligned to free market orientation. Banks in a deregulated environment will have a greater scope for product innovations around the savings account and a better opportunity to cross-sell.

Rana Kapoor
Founder, MD & CEO, Yes Bank