Rejecting its own Bank Rate as the benchmark for returns on small savings, budgeted at Rs 165,000 crore (Rs 1,650 billion) this year, an RBI panel has said the rate was administered and did not convey the right signals on the current interest rate.
The panel, headed by Reserve Bank Deputy Governor Rakesh Mohan, also rejected alternative benchmarks like inflation due to problems in measurement of expected inflation, and interest on market borrowings of the states owing to non-existence of a liquid and deep secondary market.
"At present, the Bank Rate does not convey the current interest rate signals appropriately, as the apex bank uses repo rate simultaneously for short-term liquidity management," the committee, which went into Administered Interest Rate and Rationalisation of Small Savings Rate, said in a report to the government.
Further, the panel said: "The Bank Rate is a medium-term policy signalling rate and is itself an administered rate."
Already, bankers have said Bank Rate, the interest the RBI charges on commercial banks, has lost relevance and in its place has come the Benchmark Prime Lending Rate, which is arrived at after assessing the cost of funds, operating expenses, provisioning for bad loans and profit margins.
Regarding commercial banks' deposit rates, the panel said it was yet to be determined competitively as only a few leading banks played a major role in overall price discovery.
The panel finally endorsed the findings of Y V Reddy committee, which felt that the borrowing costs of the Centre or the secondary market yields on dated government securities should be the benchmark for small savings rate.
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