Ending the era of controlled interest rate regime, the Reserve Bank on Tuesday freed savings bank deposit rates, a step which bankers said could fetch better returns for depositors as competition will intensify.

". . .banks are free to determine their savings bank deposit interest rate," the Reserve Bank of India said, adding the change will come into force with immediate effect.

While freeing interest rates on savings bank accounts, the RBI has said that banks will have to offer a uniform interest rate on deposits of up to Rs 100,000.

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For savings bank deposits of over Rs 100,000, banks would be free to provide differential interest rates.

Till now, banks were mandated to give 4 per cent interest rates on such deposits.

"The deregulation will increase cost of funds for the banks in general. Most of the banks would be taking a call on increasing rate on savings bank deposit in the next few days," Oriental Bank of Commerce executive director S C Sinha said.

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By freeing the savings bank deposit rates, RBI has demolished the last bastion of the regulated interest rate regime.

As part of the economic reforms programme, RBI had earlier given freedom to banks to determine fixed deposit rates, depending on their asset-liability positions.

"There should not be any discrimination from customer to customer on interest rates for similar amount of deposit," RBI said further.

About 20-25 per cent of the total bank deposits are parked in savings bank accounts.

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The Reserve Bank would be separately issuing operational guidelines on interest rate on savings bank accounts.

Earlier in April, the RBI had floated a discussion paper on 'Deregulation of Savings Bank Deposit Interest Rate'.

The discussion paper had spelt out the pros and cons of deregulating interest rate on the savings bank deposit.

The discussion paper had evoked wide-ranging responses from a cross-section of stakeholders. There were suggestions
for and against deregulation.

"On balance, it is felt that the time is appropriate to move forward and complete the process of deregulation . . . .", RBI said.