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Click here to return to main page of Annual Policy Statement 2006-07
Part II. Annual Statement on Developmental and Regulatory Policies for the Year 2006-07
Interest Rate Policy
108. Progressive deregulation of interest rates in those segments that have remained regulated for reasons relevant at different times has been engaging the attention of the Reserve Bank and wide consultations have been held with various stakeholders. In this context, the Reserve Bank requested the Indian Banks’ Association (IBA) to undertake a comprehensive review of the interest rate on savings bank deposits and lending rates on small loans up to Rs.2 lakh.
(a) Interest Rate on Savings Bank Deposits
109. The interest rate on savings bank deposits is regulated by the Reserve Bank and is currently prescribed at 3.5 per cent per annum. Based on a review of current monetary and interest rate conditions, including a careful consideration of the suggestions received from the IBA, it is considered appropriate to maintain the status quo while recognising that deregulation of this interest rate is essential for product innovation and price discovery in the long run.
(b) Setting of Interest Rates on NRI Deposits
110. The ceilings on interest rates on NRE and FCNR (B) deposits are linked to the LIBOR/SWAP rates and are fixed on the basis of rates prevailing as on the last working day of the preceding month. In February 2006, banks were advised that the Foreign Exchange Dealers Association of India (FEDAI) would quote/display the LIBOR/SWAP rates to be used for fixing interest rates on NRI deposits, in order to ensure uniformity and transparency. FEDAI publishes the deposit rates for five maturities in six currencies prevailing on the last working day of each month.
(c) Interest Rate on FCNR(B) Deposits
111. Banks were free to accept FCNR (B) deposits and offer fixed and floating rates, subject to the ceiling of LIBOR/SWAP rates for the respective currency/maturities minus 25 basis points. On a review, the ceiling interest rate on FCNR (B) deposits was increased by 25 basis points to LIBOR/SWAP rates for respective currency/maturities with effect from close of business in India on March 28, 2006.
(d) Interest Rate on NRE Rupee Deposits: Increase in Ceiling
112. Interest rates on non-resident (external) rupee deposits for one to three years maturity should not exceed 75 basis points above LIBOR/SWAP rates for US dollar of corresponding maturity. On a review of current monetary and interest rate conditions, it is considered appropriate:
• to increase the ceiling by 25 basis points to 100 basis points above LIBOR/SWAP rates for US dollar of corresponding maturity with immediate effect.
(e) Interest Rate on Export Credit in Foreign Currency: Increase in Ceiling
113. At present, exporters can avail of pre-shipment and post-shipment credit in foreign currency at interest rate within a ceiling of LIBOR plus 75 basis points. On the basis of the recommendations of the Working Group to Review Export Credit, it is proposed:
• to increase the ceiling interest rate on export credit in foreign currency by 25 basis points to LIBOR plus 100 basis points from LIBOR plus 75 basis points with immediate effect.
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