The State Bank of India’s (SBI’s) decision to cut the savings bank interest rate twice in less than a month signals a narrowing of the spread between zero-interest current accounts and interest-bearing savings accounts. They also indicate that the flexible savings bank rate will ultimately have to be linked to money market returns.
Under Reserve Bank of India (RBI) , current accounts carry no interest. In 2011, the central bank deregulated savings bank rates, the only requirement being that deposits under Rs 1 lakh must carry the same rate. For deposits above Rs 1 lakh, a bank can offer higher rates.
Flush with funds and with demand for credit weak, public sector banks like SBI find that savings accounts have become costly when they effectively function like current accounts. For balances upto Rs 1 lakh in savings accounts, you can withdraw your money at will, and the interest is payable on a daily balance basis. In short, savings account balances are like liquid money market deposits, whose rates must be aligned to market realities.
On 12 March, SBI cut the savings bank rate to 3 per cent and two days ago (7 April) further to 2.75 per cent. Last month, the bank also did away with the average monthly balance (AMB) requirement, signalling once more that it views idle savings deposits as no different from short-term money market deposits. The AMB is actually a virtual fixed deposit that resides within the larger saving bank balance.
In most Western banks, interest rates are paid only if one maintains AMB; alternately, the rates depend on underlying money market rates (and are, in effect, based on investments in money markets); chequing accounts, where the entire money can be withdrawn at an instant’s notice, usually draw no interest rates.
India has been a unique market where regulation ensured that demand deposits (which is what idle funds in the savings account amount to) earned a certain minimum interest rate. Chequing deposits earn nothing. Now that the RBI has moved away from regulating savings and deposit rates, banks are finding that these idle balances are a huge cost at a time there is no shortage of money seeking safe havens.
The next logical move is for mutual funds to offer savings-type deposits with cheque facilities. The line separating banks from mutual funds that offer liquidity and cheque payment facilities from the same account is growing thinner.
If savers want higher returns, they will have to opt for fixed deposits as savings accounts with cheque facilities will tend towards lower rates in the medium term. Idle money is not going to earn as much as it did in the past. If you do not want to actively manage your idle money, you should hand it over to a mutual fund to do so.
Note: With SBI, the idle savings bank rate is 2.75 per cent; the seven-day deposit rate is 3.5 per cent, and the 46-day rate is 4.5 per cent. Senior citizens can earn 0.5 per cent more. The savings rate is a loser for everybody.
The different markets for money are beginning to break the walls separating them.
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