Give Banks A Break

Interest rates for bank deposits are falling. It is time to look at debt and equity mutual funds.

- Vandana

When HDFC Bank cut the interest rate for its savings accounts in August, Rajnish Mittal was among the many customers who cursed banks for not giving adequate returns on their hard-earned money. Mittal, however, is happy now. Less than a month after the rates were lowered, he thanks his bank for doing it. “It gave me the much needed jolt to look at other financial products,” he says. “Had my bank not lowered the rates, I would never have looked at debt mutual funds.”

In his early forties, Mittal is a conservative investor who does not want to risk his money. Till a month ago, he was investing in fixed deposits, National Savings Certificates, Public Provident Fund and insurance schemes. But he had been upset since last year at the shrinking returns on his other investments. The cut in the savings account interest rate, the second in the past one year, came as the final straw. He soon decided to consult a financial advisor. In hindsight, it was a smart decision.

At least half a dozen banks have slashed interest rates for savings accounts—from 4 to 3.5 per cent. This means that ₹10,000 in a savings account, which would have earned ₹400 as interest a year earlier, would now get only ₹350.

Even before they cut rates for savings accounts, banks had reduced interest rates for fixed deposits. Last year, the government lowered rates for small saving schemes, much to the dismay of the public, especially senior citizens. In general, the signals coming from the finance ministry— which is that of a falling interest rate regime—is not favourable, especially so for small investors.

So, why are interest rates for deposits falling?