Impact of Different Rates of Interest Offered by Two Sets of Institutions

As an unsaid but a common practice in the banking industry, the banks have intentionally been using delaying tactics in transferring the benefits of rates cuts by RBI to the retail customers. They have been giving a number of accuses on account of many bottlenecks and limitation to which these institutions were exposed to. This unhealthy practice was leading to many problems relating to transparency in the whole banking system. Also in such a time when the situation on demand front in Indian economy is very grim and every single penny in the hands of customers is important and it is needed to further augment the purchasing power of customers. This tactics followed by banks have been hurting economy as whole. So it had alerted the RBI to act on. So it brought and asked the banks to link their lending rates to an external benchmark rate such as repo rate.

In this effort to bring in transparency in lending practices, lending rates are being linked repo rate but the interest rates on deposits have been left to banks' discretion. At present, banks are offering comparatively lower rate of interest on deposits but other institutions like Post Office are offering very high rate of interest on public deposits. However these deposits in institutions like Post Office are mostly long term and for the purpose of tax saving. But still this huge difference in rate of interest offered by two sets of institutions needs assessment by the government as well as central bank whether these practices have any negative impact on financial markets because if this difference keep on widening, it would be very difficult for the banking system to attract public deposits. If there is any such indication, these rates need to be indirectly regulated if possible.

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