For investors in India, these are harsh days. Fixed-income returns have begun to decline after the pandemic. In March there was a first drop in the rates of savings and FD costs. And now, large public and private banks once again slashed savings and fixed deposits interest rates.
The next round came when the RBI cut the repo rate for the second time in three months. This 40 basis point reduction allows banks to borrow RBI at 4%.
This article sheds some light on the new rates and things to do to guarantee so that your debt investment returns at least beat inflation.
Why did the banks revise their interest rates?
- The banks can borrow at RBI at 4%, as described at the beginning. This indicates that now banks have access to liquidity to lend at a very low cost. Thus, by paying Fixed deposit interest rates, no requirements to raise capital from individuals.
- Owing to the lockdown and eventual stoppage of all commercial operations, the loan demand was inadequate. And banks were full of cash. So, no incentives for paying high fixed deposit interest rates.
Here’s how various banks’ interest rates have plummeted
State Bank of India
The SBI lowered its savings bank deposit interest rate by five basis points to 2.70 % annually. In April earlier, the bank had introduced a 25-base-point cut from the previous 3 % of its savings account interest rate to 2.75%. The rates will be effective from 31st May. In the meantime, the fixed deposit interest rates have been lowered by 40 base points. The bank’s highest return on deposits for five years thus amounts to 5.4%.
On all deposits less than ₹ 50 lakh, the ICICI bank cut interest rates by 25 basis points to 3% from 3.25%. The Fixed deposit interest rate for deposits exceeding ₹ 50 lakhs is 3.50% of the actual 3.75%.
As of 1st June, Axis Bank lowered the savings account interest rate by 25 basis points. The savings interest was reduced to 3.5 % for the balance up to ₹ 50 lakh. The interest rate remains the same at 3.5 % in the balance over ₹ 50 lakh. The FD rates have also been revised.
Kotak Mahindra Bank
The Kotak Mahindra Bank rate was lowered by 25 bps to 3.5% from 3.75% in the first place for a savings account for balance up to ₹ 1 lakh. The interest rate was lowered from 4.5 % to 4% by 50 bps for balance above Rs 1 lakh. The revised rate shall be applicable from 25th May.
Money deposited in bank deposits now loses value rather than increasing due to this cut in rates.
With inflation at 4%, savings and short-term FD interest rates going below 4%, the actual benefit is negative for money on your savings account.
In the meantime, while the FD returns on a long-term basis barely outweigh inflation, you will have to consider paying tax on your FD savings while estimating the return. A 30% levy on returns will take long term FD below the inflation rate for those in the top tax bracket.
Fortunately, there are solutions to ensure that inflation is dealt with and returns are raised marginally without too much risk.
Debt funds that retain low risk: an insightful alternative to bank deposits
The debt funds here are not going to give you the 8-9% return. These funds are structured to sustain low or moderate risk and provide you with 2-3 percent returns to beat inflation.
Other choices for exploration
SmartDeposit for additional capital on the savings bank account and less than six months of FDs:
You should bring additional money into Smart Deposit because of the absence of a savings account – which you use for daily expenses.
It’s a compromise that helps you to gain money without lock-in or redemption fees than saving account interest rates. The best thing is that your money is deposited in a cash fund that is the safest type of mutual fund, with almost no risk. It also comes with the Instant withdrawal facility to provide you with 24/7 real-time access to your earnings. Just enter your account for tap and profits.
Banking and PSU Debt funds for FDs of 2-3 years
These funds only lend to banks and firms in the public sector. The probability of borrowers defaulting is very low with the high performing borrowers. However, as interest rates in the economy increase, they are impacted.
For these assets, you should receive returns marginally better than FDs for the same length. If you keep saving for three years, however, dividends are taken into account as long-term capital gains and the indexation benefit significantly decreases your tax liability.
Ultra low-duration funds for 6-12-month FDs
Opt for Ultra-Low Period for the capital you won’t need for 6-12 months. These funds are loaned to highly valued borrowers and last a little longer than cash funds. While they are a little more at risk than cash funds, they still are one of the best debt funds that you can invest in.
Until the economy gets in high gear, lower interest rates will remain a reality. Although you have a choice for debt funds to obtain prices that at least have impacted inflation.