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SBI cuts savings rate further, what should you do?

Opening a zero balance bank account that gives a higher interest rate such as Kotak 811 would be the best option in the current scenario.  

The interest rate set by the RBI(repo rate) move the market. Everyone in the financial industry to the pensioners look forward to the interest rates decision that is taken by the Reserve Bank of India. Every player has different expectations. While pensioners want a higher interest rate which will help to generate more returns, corporates and loan buyers look for lower interest so that they can get loans at a lower interest rate. The RBI make changes in the interest rate taking into consideration the overall state of the economy and inflation etc.

Banks are expected to follow the repo rate set by the RBI. Repo rate is the rate at which banks borrow from the RBI. However, the end decision is up to the banks. During an interest rate cut by RBI, banks pass on the cut to the depositors of savings account, recurring account and fixed deposits and not to loan customers.

Recently, the RBI cut the repo rate to 6% following which the SBI also passed on the cut to their saving accounts holders. The India’s largest bank SBI has linked its rate on savings account with deposits above Rs.1 lakh to the interest rate by the RBI from 1st May. Hence, the interest rate on the savings account stands at 3.25% per annum. It is 275 bps below the previous interest rate of 3.5%.

Typically, major banks follow the interest movement of the SBI and hence it is expected that other banks will also cut the interest rates on their savings account.  

At such times, individuals can look for banks that give attractive interest rate on their savings account. Medium sized banks and newly established banks offer higher interest rates. A higher interest rate on savings account is important as it can curb your tendency to overspend, help you earn more returns and help you to fulfil your financial goals. Savings account is an easy way to accumulate and park your excess funds for emergency. Financial advisors recommend that emergency fund should have a minimum of 3 to 6 months of expenses.

Banks such as Kotak Mahindra Bank and IDFC First Bank offer higher interest rate of 6% and 7% respectively on their Kotak 811 and Savings Account.

Let’s see how a deposit of Rs.10,000 per month  would grow in three years in SBI and Kotak Bank. We have assumed that a person has saved Rs.10,000 per month over three years in both the banks.

SBIKotak Bank
Amount saved every monthRs.10,000Rs.10,000
Interest rate 3.25% 6%
No. of years 33
Amount grown to Rs.3.78 lakhRs.3.93 lakh
Difference Rs.15,763

Here, we see that the money deposited in Kotak Bank would grow Rs.3.93 lakh, which is Rs.15,762 more than the money deposited in the SBI Bank.

However, while interest rate is one of the important determinants while selecting a savings account, there are other factors such as other charges and average monthly balance and ease of convenience. If we compare Kotak 811 and IDFC First Bank’s savings account, Kotak 811 is a digital account while the other is not. Kotak 811 is a zero balance account while the average monthly balance requirement of IDFC Savings Account is Rs.25,000. There are also charges for non-maintenance of the average monthly balance. Rs.400 will be charged if the average monthly balance falls below Rs.5,000. As Kotak 811 is a zero balance account, there are no such charges. Opening a Kotak 811 is also extremely easy and it can be opened within minutes through online or through the Kotak app.

Liquid fund is also considered as a better alternative of savings account. Liquid funds give higher returns than savings account but they give returns of around 6-7%. Recently, liquid funds were in trouble as few companies defaulted on their principal and interest repayments on their debt papers. Although liquid funds are considered safe it is also comes with a risk. Taking a risk would make sense if the upside of investing in liquid funds was huge. However, you see that the returns given by liquid funds are more or less in lines with the interest rate offered by some of the savings account. 

Hence, Kotak 811 is one of the best savings accounts in the current scenario. It is a zero balance bank account and gives a higher interest rate of 6%.

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