8/2/2019 What is Deregulation of Interest Rates

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These are some of the expected results of the deregulation:

Higher returns on short-term, liquid deposits

A direct impact of the deregulation of savings bank rates will be on short-term deposits. Usually,

banks offer savings account interest rates on short-term and ultra short-term deposits. A rise in the

interest rates on savings bank deposits means the interest rates on these short-term deposits will goup too, especially on the higher amount deposits. A rise in the interest rates on short-term deposits

will push up the yields from liquid deposits and investments.

However, in percentage terms, the interest rates are not expected to go up very significantly.

Therefore, it will not be a meaningful gain for small and individual investors. Yet, a small hike in the

interest rates will result in more gains for high net worth individuals (HNIs) and the corporate sector

due to their larger deposits and investments.

Higher cost for banks

The deregulation ofsavings bank deposit interest ratesis expected to put additional cost pressures

on banks and thereby impact their profitability. Analysts believe banks are likely to offset the impact of

this increase in interest costs partially by levying transaction and service charges on bank accounts.

Also, banks may pass on some of this additional cost to their loan products. Analysts believe banks

will raise interest rates across the board after the recent hike in the repo rate by the Reserve Bank of

India (RBI).

Debt instruments attractive

Debt instruments are looking more attractive in the current market conditions as their yields have

gone up due to the interest rate hardening. On the other hand, volatility in the stock markets and

changing outlook of the corporate sector have tilted the risk and returns equation towards risk for

equitybased investments.

Therefore, it is recommended that individual investors (especially with a short to medium-term

horizon) should review the various aspects of their investments such as objective, horizon, risk

appetite etc, and make the required changes in their portfolios to ensure balance between risk and

returns.

Rising cost for borrowers

The interest rates on various loan products are bound to go up after the recent rate hike by the RBI.

Some banks have already announced they will be increasing theirloan ratesshortly. The rate hike will

not pinch much in case of small quantum and short duration borrowers as they can manage the

higher interest rates by increasing the loan tenure, and keep their monthly EMIs unchanged.

On the other hand, a higher interest rate is bad for borrowers with large loans as they are bound to

pay more in terms of increased EMIs. It is recommended that borrowers remain regular in their EMI

payments. One can discuss with the bank in case of difficulties in paying a higher EMI.

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8/2/2019 What is Deregulation of Interest Rates

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