Money & Banking

Interest rate deregulation: Nugget from history

| | Updated on: May 01, 2011
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The Reserve Bank has posted a discussion paper on savings bank rate deregulation on its Web site. It has asked the public for feedback.

This is not surprising because when it tried deregulating in 1985, it forgot to tell even the Banking Secretary.

The story has been told by Mr S. S. Tarapore in Episodes from Monetary and other Financial Policies (1982-1997): An Anecdotal Presentation , published in a volume of essays in honour of Dr C. Rangarajan earlier this year.

“When Malhotra went over the proposed measures with the Finance Minister, the then Finance Secretary Mr S. Venkitaramanan was present, but… (Banking Secretary) Dr Bimal Jalan was held up in another meeting. By the time he walked into the meeting, the deposit rate change had been already discussed.”

Both Mr Malhotra and Mr Venkitaraman forgot to tell Dr Jalan, perhaps thinking the other would. Mr Tarapore writes, “It appears that neither Malhotra nor Venkitaramanan briefed Bimal Jalan about the measure… he heard about this measure only when the policy was announced.” His response is not known.

Sheep mentality

The de-regulation was a limited one. Within a ceiling of 8 per cent banks could fix their own deposit rates for maturities between 15 days and less than one year.

It proved to be an utter flop because, writes Mr Tarapore, “all banks, like sheep jumping off a cliff, offered 8 per cent for 15 days without giving attention to their profits. The RBI's expectation that banks would use their discretion with some finesse… was totally belied. The RBI had no option but to revert towards the end of May 1985 to fixing the rates for all maturities… In retrospect, it would appear that banks, after serving out life imprisonment, just did not want freedom!”

The move was reversed after the banks went to Dr Jalan and said they would run up huge losses of about Rs 100 crore.

V. P. Singh and Dr Bimal Jalan escaped criticism and only Governor R. N. Malhotra, Deputy Governor Dr C. Rangarajan and Mr Tarapore took the blame for the fiasco.

Published on May 06, 2011

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