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Savings rate cut

Feb 28, 2003

After desisting from reducing the savings deposit rates for a long time the RBI has finally given in and reduced the rates to 3.5% from the existing 4%. This announcement is in line with the central government’s continued efforts to rationalise administered interest rates. Earlier in the budget the Finance minister had announced a 1% reduction in all small savings schemes. The central bank has also announced a cut in repo rates from 5.5% to 5%. The immediate benefit will accrue to banks that have a high ratio of retail deposits. This is due to the fact that banks will have to pay less interest on these deposits, thus helping them improve their net interest margins. Another major impact of this measure is likely to be the rise in prices of G-Secs. Lowering of administered interest rates inevitably sends out a signal that the government may in the future look to lower interest rates like the bank rate.

This rise in prices will benefit banks in booking profits in their G-Sec portfolio. We will put up a detailed report on this development once the details are clear.

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