Freeing the SB deposit rate

There has been much talk and debate about the Reserve Bank of India monetary policy that increased the key policy rate by half a percentage point. That headline grabber hogged so much limelight that the other significant prescription on increasing the savings bank accounts rate from 3.5 percent to 4 per cent almost went buried under the anti- inflationary hammer of the RBI. The monetary policy of last week marked a significant shift from drawing a balance between growth and inflation to fighting inflation and sacrificing growth. But no less significant was the RBI action on savings deposit rates which have remained unmoved for more than eight years. The increase in the rate of savings deposits has gone without due recognition that the RBI has used its mandate for the first time in many years to bring direct and immediate relief to the common depositors. It is pertinent to point out that in our country, the term “savings bank” is more of a misnomer: it brings access to the banking system but is not a tool to building savings. As such, the rate of 3.5 per cent has remained unchanged since as far back in time as March 1, 2003. The rate of interest on savings deposits was stipulated at 6 per cent in 1992. The rate has been progressively reduced by the RBI until we have arrived at this stage of 3.5 percent, and now 4 per cent with effect from last week. It is remarkable that in the period that saw the biggest and most successful push for liberalisation, a time when our leaders and policy makers repeatedly spoke of opening up the system to take our country on the road to a much touted economic stardom, the one rate that remained pegged and fixed at a ridiculously low level was for the money of the smallest of depositors who would add up to be the largest base of ordinary Indians in the banking system. As much as 84 per cent of the total savings deposits come from the household sector, according to the RBI. This is only typical of the Indian manner of governance where the one with the weakest voice is heard the least, and last. So it would be now in order to congratulate the RBI Governor for taking a step in favour of small depositors, embedded right within the monetary policy and for doing so at a time when the RBI has already put out a discussion paper on the deregulation of the savings bank deposit rate. There will be those who will argue that there was no need for the RBI to act on the savings bank rate even before the voice of the various participants on the discussion paper is heard. Indeed, there are already those who argue that the time is not right for freeing the savings rate, that the banks could suffer asset- liability mismatches and the net interest margins of banks would be badly hit. We have heard all of this before. As the RBI discussion paper itself points out, the central bank weighedin on the subject in 2002- 03 but held back the time was not considered right. It again came up in 2006- 07, when, interestingly, the Indian Banks’ Association (IBA) favoured deregulation “in the long run” but not just yet! The IBA wanted status quo; the RBI delivered it. It would be heartening to see the RBI not succumb this time. Already, the discussion paper has been praised for the quality of its inputs as well as its clear approach in favour of deregulation. This is the approach that sends out the right signals, that sets the ball rolling for change and will deliver the one message that the RBI must and needs to deliver -- that the marble white headquarters building is not an ivory tower for bureaucratic economists, that the RBI is an institution that will stand up for the common man. This is something that the RBI rightly aspires to. And it is the Governor, no less, who spelled out this aspiration earlier this year when speaking to graduate students at the University in Orissa. Here, Dr. D Subbarao candidly admitted that most people, even educated Indians, did not know much about what the RBI does. “ Many people think of the Reserve Bank as a mysterious institution, a sort of monolith doing obscure things that have no real relevance for the everyday lives of people,” the Governor told the audience at the University of Sambalpur. The perception needs to change. And it will change faster when the RBI stands up for the common man, the ordinary Indian and that faceless depositor whose money and trust is the real power behind all that the banking system delivers.