It is never a good idea to let funds idle away in your savings account, fetching meagre returns. State Bank of India’s latest move to link savings deposit rates to the RBI’s repo rate, can pinch you even more over the next year, as the central bank lowers its repo rate.

Rather than let large sums of money idle in your savings account, look for options such as automatic ‘sweep’ facility that moves excess money from your savings account into a fixed deposit, to earn better returns.

SBI’s move

SBI has linked savings bank deposits with balances above ₹1 lakh to the repo rate — 2.75 per cent below repo rate, effective May 1, 2019.

At the current repo rate of 6.25 per cent, this works out to 3.5 per cent. Since low-value deposits (up to ₹1 crore) currently fetch 3.5 per cent, there will be no immediate change for depositors.

Also, SBI has exempted savings deposits up to ₹1 lakh from being linked to the repo rate — implying that for these deposits the rate will be fixed (at 3.5 per cent currently).

But for depositors with balances above ₹1 lakh in their SBI savings account, the rates will move in tandem with the RBI’s repo rate.

The RBI cut its repo rate by 25 bps to 6.25 per cent in its last February policy. Broad expectations are that the central bank will continue to cut rates in the coming months.

Hence, if the repo rate moves lower, say, by another 25 bps to 6 per cent, then SBI’s savings deposit rate will move lower to 3.25 per cent. This will impact depositors with balances of over ₹1 lakh. On a ₹10-lakh deposit, the RBI’s 25 basis point cut hereon will imply a loss of ₹2,500 annual interest.

On a ₹1-crore deposit, the impact will be a higher ₹25,000 of interest loss. Hence, it makes all the more sense to avoid parking huge sums in your savings account.

Bumping up

One way would be to move surplus funds in your savings account to fixed deposits that offer a much higher return. But this may lower your flexibility as your money gets locked for a fixed period of time.

So how can you earn FD returns without giving up the comfort of easy liquidity?

An automatic ‘sweep’ facility offered by banks can earn you higher returns without compromising on liquidity. This is because, in case of shortfall, money can be allocated back to your savings account.

However, you need to understand the fineprint of each bank’s sweep facility before choosing this option.

The other way to maximise your returns from savings deposits, of course, would be to shop for the best rates in the market.

Will other banks follow?

Currently, some banks such as YES Bank, Kotak Mahindra Bank (6 per cent for balances above ₹1 lakh up to ₹1 crore), and IndusInd (5 per cent above ₹10 lakh up to ₹1 crore) offer higher savings deposit rates.

But after SBI’s move, the million-dollar question is, will other banks also link their rates to the repo rate (or other external benchmarks)?

When SBI had cut the savings deposit rate two years back, other banks were quick to follow.

This time around, PSU banks already facing margin pressure may follow SBI and link savings deposits to the repo rate. But private banks may not tweak their rate structure in a hurry, given the modest growth in deposits. They may wait and watch before repricing their savings deposits.

Now, over time, all banks may link their deposits and lending rates to an external benchmark. So, switching banks just for better rates may not make sense.

Also, unlike fixed deposits, where the rate is a key factor, in the case of savings deposit — being a running account — ease of access, reach and convenience of banking also matters a lot.

Rising rates

While SBI’s move will hurt you now, when the RBI increases its policy rates after a year or two, you would stand to gain. Your savings deposit rates will inch up with every hike in RBI’s repo rate.

For a long time, banks were offering the same interest rate on savings account, without tinkering with it across rate cycles. SBI’s move could change the rigidity in savings rate.

However, remember that even at the peak of 8 per cent repo rate (historical high since 2012), SBI’s savings deposits at the current rate structure (2.75 per cent below repo) would offer 5.25 per cent at best.

Fixed deposits offering upwards of 6.5 per cent up to 9 per cent in recent years are still a better bet.

Hence, sweeping in your excess funds in savings account into fixed deposits will remain a better option.

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