More bad news for savings bank account holders. HDFC Bank, India's second largest private sector lender, on Thursday became the latest to cut its interest rate it offers on savings accounts, joining State Bank of India, Bank of Baroda and Yes Bank among others, who have already reduced interest rates by 0.5 per cent to 1 per cent.
The Reserve Bank of India, earlier this month, reduced the repo rate by 0.25 per cent to 6 per cent. Banks, which usually take months to pass on the lower interest rates to customers, have been swift this time around, and the move to reduce interest rates on savings bank accounts will particularly pinch the large lower and middle income households and senior citizens while largely leaving people with large deposits untouched.
Effective August 19, HDFC Bank customers who have a savings bank account balance of less than Rs 50 lakh will earn a interest of 3.5 per cent per annum versus 4 per cent earlier. However, customers who have a account balance of Rs 50 lakh or higher, will continue to earn 4 per cent interest rate.
On July 31, country's largest lender SBI too had announced a two-tier system for savings bank account holders and reduced interest rates on accounts with a balance of Rs 1 crore or less to 3.5 per cent.
“There has been a significant outflow of CASA (current account and savings account) deposits since then (demonetisation period). The revision in savings bank rate would enable the bank to maintain the MCLR (marginal cost of funds-based lending rate) at existing rates, benefiting a large segment of retail borrowers in small and medium enterprises, agriculture and affordable housing segments,” SBI had said.
Bank of Baroda, Indian Bank, Karnataka Bank and private lender Axis Bank have followed since and have also reduced their interest rates on savings bank accounts by 50 basis points in the last few days.
Yes Bank has cut its interest on savings bank deposits by 1 per cent to 5 per cent for balances of less than Rs 1 lakh, from 6 per cent earlier. Customers with a savings balance of Rs 1 lakh to less than Rs 1 crore, will continue to earn an interest of 6 per cent as earlier, while those having a balance of more than Rs 1 crore, will now earn an interest of 6.25 per cent versus 6.5 per cent earlier.
Interest rates on fixed deposits of most banks had already come down to around 7 per cent. Indications are that short-term fixed deposit rates could also fall further in the near future.
“With the interest rate cycle reaching the bottom, downward repricing of existing liabilities could facilitate a further reduction in rates. Few of the large banks cutting savings deposits rates over the last few days, which has long been agnostic to changes in the broader interest rate structure, is a move in that direction,” said Soumyajit Niyogi, associate director at India Ratings and Research.
Reduction in savings bank deposit rates will give scope to banks to reduce their MCLR, said Niyogi, adding that this could “intensify competition between large lenders with strong savings deposit franchise and capitalisation towards gaining credit market share.”
In such a scenario of falling interest rates, analysts say its a good time for people to seek investment avenues other than bank deposits.
Liquid Funds, for instance, offer a better alternative, given that they offer better rate of returns compared to bank deposits and several fund houses now allow instant redemption of 90 per cent of the amount invested in such funds. These funds could be helpful for people who don't want to invest in equity funds, which while offering higher returns, also carry more risk.
“The strategy to go about will be to have a combination of liquid and ultra-short term funds. Ultra-short term funds are not as liquid as liquid funds but are effective for a three-six months time horizon,” said Vidya Bala, head of mutual fund research at FundsIndia.com.
Customers should ultimately invest based on their future fund needs, adds Bala. As the name suggests, ultra-short term funds should strictly be considered for parking the money for a few months.
Currently, the past one-year returns of ultra-short term funds have averaged in the 7.5 per cent to 8 per cent range. On liquid funds, returns in the recent past one year have been in the 6.5 per cent to 7 per cent range. While returns on liquid funds have come down over time, in a falling interest rate scenario, they are still 3 to 3.5 per cent higher than the average savings bank deposit rates.
