Interest Rates

Last week the Reserve Bank of India freed the savings bank deposit rate. The RBI will no longer fix the savings account interest rate but will allow banks to fix the rate freely. Moreover, for a savings account balance of over Rs 1 lakh, the banks can offer differential rates to different customers. Experts believe the average interest rate on savings account will increase from the fixed rate of 4% to at least 5%. Yes Bank has already announced a 6% rate on savings accounts.

‘Currently Indians invest half their savings into physical assets like gold and real estate. Higher savings account interest rate would provide stimulus to get people to put their money into banks. Secondly, competition among banks on interest rates would end an era of ‘lazy banking,’ when bankers sat in their air-conditioned offices and waited for customers to walk in and hand them their money.’

Today, urban India is going through a sea change; salary levels are higher, lifestyle expenses are greater; aspirations are bigger. At the same time, pensions are smaller. The Government no longer pays for our retirement. The Government has created an environment for us to earn well today, but take care of our own retirement. Another reality is consistently high inflation; the average annual CPI inflation in urban India in the last 5 years has been more than 9%. Savings account interest rate going up from 4% to 5% is not going to matter. Even if banks offer differential rates to customers with more than Rs 1 lakh in savings account, the difference is not likely to be enough to beat inflation. What is important in such a scenario, is aggressive wealth creation during working years. But that is a task that takes analysis and dedication; not something that comes by effortlessly.

So even a slight increase in interest rate is likely to create a strong temptation to leave money in savings account. In an era when average inflation was 4%, an interest of 6 or 7% sounded reasonable. But one side of the equation has changed and is now at 9%. The other side of that equation thus needs to be far more aggressive.

So while banks might try to lure in customers with ‘attractive’ savings interest rates, do think about it before you decide to leave large sums of money ‘idle.’

Bharth kumar

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