Indian lenders are not in favour of the Reserve Bank of India's proposal to

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deregulate savings deposit rate -- the only regulated one in the system now -- citing the current volatile market environment.

Savings deposits that are a source of low-cost funds for banks form 22 percent of banks' total deposit base, the Reserve Bank of India had said in late April.

The Indian Banks' Association (IBA), the apex banking body, has conveyed banks' stance to the RBI ahead of its quarterly monetary policy review on July 26.

"Given the conditions in which we are today, the bankers felt it will not be appropriate for actually not going in for deregulation at this point of time," K. Ramakrishnan, Chief Executive Officer of IBA told Reuters on Wednesday.

Already banks' cost of funds have gone up after the RBI mandated that banks calculate interest paid on savings deposits on a daily basis and later in May raised rates on such deposits by 50 basis points to 4 percent, he said.

Echoing the view, state-run Corporation Bank's Chairman and Managing Director Ramnath Pradeep said it was "not the right time to go for deregulation".

"They (RBI) must consider not to deregulate the interest rate," he said.

In late April, the central bank had argued in a discussion paper savings rate deregulation will aid in monetary policy transmission, and it cannot be regulated for all times to come when all other interest rates have already been deregulated.

Bankers feel if the savings deposit rate has to be deregulated, they must be allowed to charge for services provided.

"We can't have a situation where we give free ATM transactions, free transfers and there is no cost for cheque books," said Ramakrishnan.

"This is broadly what we have communicated to the RBI - should the deregulation happens, the deregulation must be in totality."

Of late, banks have witnessed their credit growth easing due to the rise in interest rates, and higher deposit rates would add to the pressure on margins.

Banks' credit grew 1.6 percent to 40,015.21 billion rupees as of June 17 from 39,386.59 billion rupees as of March 25, while deposits were up 2.7 percent at 53,447.01 billion rupees from 52,047.03 billion rupees.

"Right now, the liquidity is really tight and in this kind of an environment you can't deregulate a product which can potentially throw nasty surprises to bankers on how to manage their deposit base," said an analyst with a local brokerage who did not wish to be named.

However, savings rate deregulation would have helped newer banks to increase their share of savings deposit by offering more attractive rates.

"Established banks will be against it and new banks be in favour because if I have rate as a tool to compete in the market, it makes it that bit easier," said a banker with a new private sector bank.