Reserve Bank of India (RBI) Governor D Subbarao took a momentous decision this week to deregulate savings bank deposit rate, the last of regulated rates. The man, who was forced to hike policy rates for 13 consecutive times in a relentless pursuit of lower inflation over the past 19 months since March, 2010, can now take pride in deregulating savings account rate, even if that means squeezing profit margins of banks in a fiercely competitive market. In an exclusive interview with Financial Chronicle after unveiling the second quarter review of monetary policy, Subbarao said: “For a large majority of low-income households, this is their principal avenue for savings. So they must get a market-related interest rate. That was the main motivation, and not managing banks’ margins.” The fineprint of the move tells another story. By deregulating rates, he wants to continue what RBI has been doing through this long rate-tightening cycle — increase lending rates. Once banks start increasing savings bank deposit rates, their cost of funds will move up, forcing them to increase lending rates. Subbarao was appointed the 22nd governor of RBI on September 5, 2008. As his term was coming to an end last month, he got an extension up to September 4, 2013. Last year, Subbarao ushered in base rate to replace the long-existing benchmark prime-lending rate in a bid to make the loan pricing mechanism more transparent. He has also proactively pushed banks to cover unbanked areas through a slew of sops and policy measures. His balancing act to keep inflation down by sacrificing overall economic growth may have drawn many critics, especially those in the middle-class. Home, car, education loans have all become pretty expensive over the past two years. Unfortunately, in the past 19 months of the rate-tightening cycle, the apex bank has always been behind the curve with small predictable moves of 25 basis points. It was forced to revise its inflation target for March 2012 twice since May, which has been now pegged at 7 per cent. Whatever one may argue about the independence of RBI, it is clear that finance minister Pranab Mukherjee has finally prevailed upon the governor to give up on the rate-tightening cycle for the larger interest of pushing growth and investment in India. With food inflation hovering over 10 per cent and wholesale price index above 9 per cent, it was but imperative for RBI to maintain a hawkish stand. But Subbarao has always been known to be a man of consensus, someone willing to take a few risks notwithstanding the criticism. From his days in Andhra Pradesh, where he was assigned to set up the state beverage corporation, to the deregulation of savings deposit rates, Subbarao’s focus has been very clear — the man on the street. He remains an egalitarian in a banking system where small customers pay higher rates of interest to cross-subsidise lower rates availed by corporate borrowers.
FC
