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Interest rates on Savings Accounts deregulated – What does it mean for you?


On 25 Oct 2011, the Reserve Bank of India (RBI) made an announcement that it has deregulated the interest rates for savings accounts in banks.


The History

So far, the interest rate earned by the money in your savings account was fixed and regulated by RBI – it has been 4% per year for some time now.


Details of the RBI Order

Although a banks would be free to decide the rate of interest it offers on its savings accounts, it still has to follow some guidelines.

There would be 2 categories of deposits:

  • Less than Rs. 1 Lakh
  • Rs. 1 Lakhs and above

The banks would have to offer a single rate of interest to all deposits below Rs. 1 Lakhs – the banks would decide this rate (say, 5% per year), but it would need to be the same for ALL deposits lower than Rs. 1 Lakh.

For the deposits in the other category (Rs. 1 Lakh and above), it becomes interesting.

The banks would be able to come up with various slabs based on the deposit amount, ad can offer a different interest rate for each slab!

(The banks can not, however, offer different interest rates to different individuals or groups – the rate would be the same for everyone within a single slab.)



This is best understood using an example: A bank can offer the rate of interest of 5% for amounts between Rs. 1 Lakh and Rs. 1.5 Lakhs, 5.25% for amounts between Rs. 1.5 Lakhs and Rs. 2.5 Lakhs, and so on.


The Analysis – What Does This Mean?

Now that there is no restriction on fixing the rate of interest on the savings account, the banks would be able to freely decide the interest rates that sit them and their customers. How does this impact you?

Well, with the rates of interest going up, some banks may raise the rate of interest, which means more money in your pockets!

(BTW, the daily calculation of interest for savings accounts is already helping you – please read “Bank savings accounts to earn more interest for you starting today” for more details)

Smaller banks are expected to raise the interest rates by a large degree, whereas the rate increase by the larger banks would be quite small, if at all. This would be to attract people to open savings accounts with them.


What should you do?

Although it sounds great, this development would hardly have any impact on you.

Please keep in mind that moving your savings account from one bank to another involves costs in terms of time and hassles. Plus, your employer might have an arrangement with only certain banks for having a salary account, and so you might be tied to a bank anyway! So, moving your account to another bank for earning more interest would not be feasible.

And an increase in this rate would anyway not mean much to you – after all, if you have significant savings, they are better parked in the bank’s fixed deposits. And if you don’t have significant savings, this increase would not be much in absolute, Rupee terms!


The Situation So Far

Yes Bank has raised the interest rate for all savings accounts (both below and above Rs. 1 Lakh) to 6% per annum.

Kotak Mahindra Bank has raised the interest rate for savings accounts to 6% per annum for deposits  greater than Rs. 1 Lakh. For deposits of less than Rs. 1 Lakh, the rate is 5.5% per year.

No other major bank has announced an interest rate increase for savings bank accounts yet.

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