What you should do when interest rates on savings accounts fall
On 31 July, State Bank of India (SBI), the country’s largest lender, cut the interest rate on savings account deposits from 4% to 3.5% per annum for deposits up to Rs1 crore. For deposits above Rs1 crore, account holders continue to earn 4%. Here is a look at what it means for you and what you should do.
Till 2010-11, the interest rate on savings account deposits stood at 3.5%. In October 2011, the Reserve Bank of India (RBI) deregulated interest rate on savings accounts. This allowed banks to set their own interest rates. From 2011-12 onwards, a majority of the large commercial banks offered an interest rate of 4% irrespective of the deposit amount.
However, then relatively newer banks such as Yes Bank Ltd and Kotak Mahindra Bank Ltd started offering higher interest rates of 6-7%. Even today these banks offer a higher interest rate compared with large commercial banks such as SBI, ICICI Bank Ltd, Punjab National Bank and Bank of Baroda. Smaller and mid-sized bank also offer a higher rate than SBI. For instance, RBL Bank Ltd offers 5.50% for up to Rs1 lakh. Till 31 July, the interest rate on deposits above Rs1 crore but up to Rs5 crore stood at 7.10%. Effective 1 August, it is reduced to 6.75%. Differentiated banks too offer higher rates. For instance, Airtel Payments Bank Ltd offers 7.25% on savings deposits.
Save your money
Let’s assume you leave Rs1 lakh in your savings account for 1 year. At 3.5% interest per annum you will earn Rs9.5 per day and at 4% you will get Rs10.95 a day. Remember that the interest is earned on the daily balance in your account. Financial planners do not recommend leaving money idle in a savings bank account.
In comparison to savings accounts, a liquid fund gives you better returns. Currently, the interest rate given by liquid funds is around 6.5%.
So, you can keep 1-2 months’ expenses in the savings account, and the remaining amount can be moved to financial instruments such as liquid funds—which give better returns. The more money you leave in savings bank account, the more opportunity cost you incur and also lose interest income. Instead of leaving your money idle in a bank account, put it to work by investing through other financial products.