Mumbai, June 3: The Tarapore Committee on capital account convertibility has recommended total deregulation of interest rates in the current fiscal. If the report is accepted, the Reserve Bank of India will have to do away with all "regulations" on the interest rate front in the forthcoming monetary and credit policy for the second half of 1997-98 due in October, 1997. RBI governor C Rangarajan has already said on record that the report would be examined expeditiously.

The Reserve Bank now controls interest rates on term deposits up to one year and savings accounts. Besides, interest rates on deposits offered by non-banking finance companies not registered with the central bank are also controlled.

Senior bankers in the public sector feel that if the interest rate cap on deposits up to one-year is lifted following deregulation, a rate war will be triggered off. Leading analysts have warned that the deregulation of interest rates will bring about certain anomalies as financial institutions are also turning into banks. According to the report, a significant element of deregulation has already been implemented and there is need for removing the remaining areas of interest rate regulation.

"The main constraints on interest rates relate to market regulation and segmentation which stunt the development of an integrated financial market. Moreover, it is important that interest rate flexibility should emerge in the very near future and the transmission of interest rate signals needs to be more effective," it has stated. The Tarapore committee has called for total transperency to ensure that there is no formal or informal interest rate control. According to ICICI Bank's vice-president (resources and planning) Mohan Shenoi, the deregulation of interest rates will bring about renewed competition among public sector, foreign and private sector banks. "If interest rates on savings bank accounts are removed most of the private banks will increase the rate to 6.5 per cent from 4.5 per cent so that we can wean away deposits from public sector banks," Shenoi said.

"The private banks are likely to offer more than what the public sector banks do," the chief of one Mumbai-based nationalised bank said. According to him, the competition among banks on the liablities side should bring down lending rates ultimately.

According to Shenoy, "Deregulation should take care of the inflationary pressures in the economy. Secondly, the government should be careful and its borrowing programme should not lead to interest rate volatility."

In the slack season credit policy, the Reserve Bank reactivated the bank rate and linked deposit rates up to one year to the bank rate. By doing so, the central bank effectively slashed the deposit rates up to one year by 1 percentage point (100 basis points) from 10 per cent to 9 per cent. Deposit rates for one year were fixed at two percentage points (200 basis points) lower than the bank rate (11 per cent). The move was followed by the lowering of the prime lending rates (PLR) by all public sector banks.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.