SBI cuts savings account rate: What does this mean for you?

For deposits above Rs1 crore, account holders will continue to earn 4% interest. Here is a look at what it means and what you should do.

On Monday, 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. The bank, in a BSE notification, said the 3.5% per annum interest rate is for deposits up to Rs1 crore in a savings account. For deposits above Rs1 crore, account holders will continue to earn 4% interest. Here is a look at what it means and what you should do:

SBI on Monday cut savings account rate for deposits up to Rs 1 crore by 50 bps.(Livemint)

The rate cut

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%. However, then new 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.

But why did SBI cut its interest rate?

“The rationale is that the real interest rate is very high right now. In April 2011, interest rate on savings accounts was 3.5% and then there was a negative carry of nearly 5%. Today, if you look at inflation and all other benchmark rates, there is a positive carry of nearly 2.46% on savings bank interest. Real interest being so high, there was no choice for the bank but to bring down the savings account interest rate. The choice was either to raise MCLR (marginal cost of funds-based lending rate) or reduce the savings bank rate. We didn’t consider it appropriate to raise MCLR,” said Rajnish Kumar, managing director, SBI.

What should you do?

Financial planners don’t recommend leaving money idle in a savings bank account. “Typically at 4% interest rate, it was never recommended to leave money in a savings account. At 3.5% it further doesn’t make any sense at all,” said Surya Bhatia, a New Delhi-based financial planner.

“Ideally, you should put your money in instruments that give you better returns. You can make use of sweep-in fixed deposit product or liquid funds,” said Bhatia. If you are under the higher tax brackets, fixed deposit may not work for you. Liquid fund will be a better option.

Swarup Mohanty, chief executive officer, Mirae Asset Global Investments (India) Pvt. Ltd, said, “For the first time, the realization of a low interest rate is likely to hit the consumers. SBI’s move will also start the entire process of shifting investment from guaranteed products to other financial assets. This is going to be a significant turning point for incremental money to move towards financial instruments. However, I am not concluding that all money will come to mutual funds but we will benefit,” said Mohanty.

So what is the interest rate on liquid funds?

“In comparison to savings account, a liquid fund will give you better returns. Currently the interest rate on liquid funds is around 6.5%. Last year it was around 8-9%. In any case you will benefit since you are likely to get 1-2% higher returns higher than savings deposit,” said Mohanty.

Hence, instead of leaving your money idle in a bank account, put it to work through other financial products.