High small savings rates a potential concern for bank deposit growth, says RBI bulletin

High small savings rates a potential concern for bank deposit growth, says RBI bulletin

The Reserve Bank of India’s (RBI) bulletin released on April 22 said that the higher rates on the government’s small savings scheme can be a potential concern for banks’ deposits.

These comments come at a time when a few banks have reduced their savings account rates, and there is an expectation of outflows from these accounts to other financial instruments.

The government of India reviewed the interest rates on various small savings instruments, which are linked to secondary market yields on government securities of comparable maturities, and kept them unchanged for Q1FY26.

According to the RBI bulletin released on April 22, 2025, these rates, currently 16-66 basis points above formula-based levels, could pose a challenge for bank deposit growth in a rate-easing cycle where deposit rates are expected to decline.

Following the RBI’s 25-basis-point repo rate cut in April 2025, aimed at supporting growth amid global uncertainties, Moneycontrol reported that banks like HDFC Bank and State Bank of India (SBI) have reduced savings account and fixed deposit rates.

HDFC Bank lowered its savings account rate from 3 percent to 2.75 percent for deposits up to Rs 50 lakh, while SBI offers 2.7 percent for deposits below Rs 10 crore.

These reductions have made savings accounts less attractive, pushing depositors toward alternatives like debt, equities, or mutual funds.

The higher small savings rates may further divert funds from banks, impacting CASA (current account/savings account) ratios, which have been under pressure for over a year.

Moneycontrol had also earlier reported that, according to analysts, while some funds may shift initially, global uncertainties could limit the impact, with depositors retaining emergency funds in savings accounts.