Saving accounts rate cut by banks may see marginal movement of funds to other financial instruments

Banks

Some banks dropped the interest rates offered on  savings accounts immediately after the repo rate cut by the Reserve Bank of India (RBI). This has made parking money in these accounts still more unattractive, and it is expected that people will opt for other financial instruments, in search of better returns.

“In response to RBI's repo rate cut, some banks have reduced their savings account rate.  This may initially lead to slight movement of funds from these accounts to other financial institutions or term deposits in search of higher returns,” said Sanjay Agarwal, senior director, CareEdge Ratings.

However, analysts were quick to add that impact will be limited given the global uncertainty leading to a fall in stock prices and rising yields on bonds. Depositors may continue to keep some funds in savings accounts and banks may focus on offering unique features and benefits to attract customers.

“Given the prevailing volatility and uncertainty in the macroeconomic landscape, individuals are increasingly inclined to maintain emergency funds in their SB (savings bank) accounts,” said V. Ramachandra Reddy deputy general manager and head, treasury, Karur Vysya Bank.

In its April monetary policy, the RBI cut the repo rate by 25 basis points (bps), the second decrease in a row, to support growth amid global uncertainties due to tensions arising from the US tariffs.

In response to this, banks have slashed their deposit as well as lending rates. For instance, HDFC Bank has decided to reduce its savings account interest rate from 3 percent to 2.75 percent with effect from April 12 for deposits of up to Rs 50 lakh. Deposits beyond this limit will earn 3.25 percent per annum. The bank had last slashed interest rates for this slab during COVID-19 outbreak, in June 2020.

India's largest bank, State Bank of India (SBI) offers an interest rate of 2.7 percent on savings deposits of less than Rs 10 crore. For deposits above this limit, the interest rate is 3 percent. The government-backed banking giant has also reduced its fixed deposit rates across tenures.

Usually, a savings account offers lower rates, but sharply lower rates typically lead to movement of funds to debt, equities or mutual funds.

The banking system has also witnessed movement of funds by customers from savings account to other instruments, and in August 2024, then RBI governor Shaktikanta Das had asked banks to offer innovative products and services and effectively use their branch networks to attract household savings as deposits.

Analysts said that the lower rates of deposits offered by banks now will have an impact on the CASA (current account/savings account) ratio of a bank. CASA refers to low-cost deposits, and the ratio has been lagging for over a year now. It is expected that banks' first-quarter results will reflect this.

However, Agarwal offered some comfort, saying that after a few months, it will be business as usualland there will not be a prolonged stress on banks' deposits due to this.