Interest rate on the money lying in savings bank accounts will go up by half a percentage point, with the Reserve Bank deciding to hike it to four per cent.

The deposit-holders in the savings bank (SB) were receiving the rate fixed eight years ago.

However, the move will raise the cost of borrowing for the banks which leverage high on the 'Current Account, Savings Account'(CASA) funds. The CASA deposits are much cheaper than the time deposits, where the going rate for six-months and above is about eight per cent.

Unlike the time deposits, the SB account interest rates are still regulated even as the central bank has put out a discussion paper for freeing the same. Interest rates on fixed deposit schemes were deregulated in 1997.

"Pending a final decision on that, we have decided to increase the savings bank deposit interest rates from the present 3.5 per cent to four per cent with immediate effect," RBI Governor Duvvuri Subbarao said while unveiling the annual credit policy for 2011-12.

On the freeing up of SB rates, he said "A week ago, the Reserve Bank put out a discussion paper debating the pros and cons of this proposal..we will review the policy on deregulating the saving bank deposit rates, based on the feedback that we get".

The RBI had said in the discussion paper that the deregulation of these rates would allow banks to introduce product innovations which could benefit the depositors.

Chairman of the Prime Minister's Economic Advisory Council (PMEAC) and former RBI Governor C Rangarajan said: "I would personally opt for deregulation of savings rate at some point".