India’s banks raise savings rates to attract local capital

While the west continues to deal with the fallout of deregulated banks, the Reserve Bank of India has deregulated the interest rates paid on savings accounts.

Rates in the largely state-controlled sector have been regulated at 3.5% for the past eight years, while inflation has been as high as almost ten percent. Commercial lending rates have meanwhile been as much as 13%.

Banking stocks fell in the expectation of higher competition.

Gainers from the move are expected to be local private banks, international banks, and savers.

Currently almost half the adult population prefers cash and gold over having a bank account. The move is probably therefore hoped to bring more liquidity into the banks, adding to the the Rs14,469bn (~$290bn) already held in these deposit accounts. This report 12 days ago says that India’s business sector has been facing rising costs of capital and that net foreign investment that in 2010 “plummeted 44% to $11bn”. This banking change could make quite a difference.

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