Ask NiyaThe interest rate structure in India has traditionally been administered to encourage savings, support priority sectors with concessional credit, and align credit flows with planning priorities.
Interest rates have been revised periodically to reflect the evolving economic and social conditions.
Between 1978 and 1981, the maximum lending rate increased from 15% to 19.5% to combat inflation, and was later reduced to 16.5% by April 1987 with inflation moderation.
April 4, 1988: The deposit rate for 91 days to under six months was increased from 6.5% to 7% to enhance returns on short-term surplus funds. The deposit rate for 91 days to under one year became 8%.
October 12, 1987: The interest rate on NRE deposits (6 months to less than one year) was raised from 8% to 8.5%.
June 1988: Interest rates on deposits of 6 months and above under the FCNR scheme were revised. FCNR/NRE changes were not applied to all deposit types.
The Narasimham Committee (1991) recommended major reforms in the interest rate structure for macroeconomic stabilization.
October 9, 1991: In response to high inflation and macroeconomic deterioration, minimum lending rates of scheduled commercial banks were raised to 20%.
June 24, 1993: With inflation abating, the minimum lending rate was reduced in four stages by 1 percentage point each to reach 16%.
To preserve economic viability, deposit rates were reduced in two stages in line with the declining inflation rate.
October 1, 1995: Banks were allowed to set their own interest rates on domestic term deposits with a maturity of over two years.
The minimum term deposit period was reduced from 46 days to 30 days. Effective July 2, 1996, interest on term deposits between 30 days and one year was capped at 11%.
To align maturity structures of domestic and NRE deposits, NRE deposit interest rates were raised twice during the year by a total of 4%.
April 1998: Banks gained more autonomy, including setting their own penal interest rates for premature withdrawals of domestic and NRE deposits, aligning with FCNR(B) practices.
April 1999: Banks were permitted to implement different Prime Lending Rates (PLRs) for different loan maturities.
As explained by Jha (2002), interest rates in India remained rigid due to:
High public debt
Underestimated non-performing assets (NPAs)
RBI's policy of continuous foreign exchange accumulation
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