TAILIEUCHUNG - A Rational Savings Bank Deposit Interest Rate in India

The National Settlement Service allows participants in private-sector clearing arrangements to do multilateral funds settlements on a net basis using balances in their Federal Reserve accounts. The service provides an automated mechanism for submitting settlement information to the Reserve Banks. It improves operational eff iciency and controls for this process and reduces settlement risk to participants by granting settlement f inality for movements of funds on settlement day. The service also en- ables the Federal Reserve to manage and limit the f inancial risk posed by these arrangements because it incorporates risk controls that are as strin- gent as. | Technical Report 2011 http . jspui handle 10054 1736 A Rational Savings Bank Deposit Interest Rate in India Ashish Das Department of Mathematics Indian Institute of Technology Bombay Mumbai-400076 India Indian Institute of Technology Bombay Powai Mumbai-400 076 India h ttp dspace. library. iitb. ac. in jspui han dle 10054 1736 IIT Bombay Technical Report October 2011 A Rational Savings Bank Deposit Interest Rate in India Ashish Das Department of Mathematics Indian Institute of Technology Bombay Mumbai 400076 October 21 2011 Abstract Reserve Bank of India RBI through one of its discussion papers proposed to deregulate savings bank SB deposit interest rate to remove the skewed benefits that the bankers may be enjoying at the expense of the depositors. The SB interest rate is one of the few RBI administered interest rates in India. While trying to ensure that the SB deposit rate is not inappropriately anchored we initiate our discussion under the premise that banks are for-profit companies and have the privilege of a banking licence for a social in addition to a commercial cause. The country s banking sector have about 13 lakh crore parked under SB deposits and about lakh crore is held under current account deposits. The 1-year term deposit rates on an average hover at the repo rate. Thus considering an average repo rate of 7 and the prevailing time components of SB and current account deposits the present system deprived the current account and savings account CASA depositors to the tune of 52 000 crore in a year in terms of interest payoffs. The prime reason why depositors money is not receiving more interest is the RBI s choice to give this 52 000 crore to the banking sector to retain their profitability and to cross subsidise their expenditures. Since banking sector has the freedom to pass any excess cost of funds to their base rate the minimum lending interest rate RBI attempts a balancing act while arriving at the SB deposit rate. .

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