Banking regulator, Reserve Bank of India has indicated during the recent monetary policy review that it will bring out a discussion paper on deregulating savings bank interest rates wherein all pros and cons of the issue can be highlighted as well as discussed.

The paper is said to reach public domain by end of December.

RBI said that with deregulation, banks would compete with one another so as to attain the best rate and attract maximum customers and in turn deposits. It fears that this competition might lose focus of banks in the motive of financial inclusion.

"Currently public sector banks that are majorly serving this purpose with no-frills accounts at 3.5% interest rate as social obligation may not want to do it later," said Subbarao.

With deregulation setting in, banks will get another tool to enhance their CASA ratios.

"Banks will hike interest rates to increase Casa ratios by attracting new customers," said Hatim Brochwala, analyst, Khandwala Securities.

"Over the long term interest rates will go down even if they go up in the short term," said Aditya Puri, managing director, HDFC Bank.