How SBI’s decision to reduce the interest rate on savings account will impact you!

On 31st July, State Bank of India which is India’s largest bank announced a rate cut on savings account by 50 basis points. What this means is, it reduced the interest rate from 4% (which was not too high to begin with) to 3.5% per annum on an account balance of less than 1crore.
That is a total of 0.5% lesser growth for your money parked in your savings account.

Let’s look at some numbers to understand its full impact:

1) Interest income: If you had Rs 5 Lakhs in your savings account then with 4% return your interest income would have been Rs 20,000 per year, due to the rate cut this income is now reduced to Rs 17,500 that is a total loss of Rs 2,500 per annum.

2) Future goals: If you were saving for your retirement or your child’s marriage or down payment of your house, you would now have to work harder to accumulate the same amount. Even a 0.5% reduction in interest rates can take your goals further away from you.

As an example If you kept Rs 5 Lakhs in your savings account for 15 years then at 4% it would have grown to Rs 9 Lakhs. At 3.5% rate your Rs 5 Lakhs will now become only Rs 8.37 Lakhs, that means you will miss your target by at least Rs 62,797.

Traditional investment products like Fixed Deposits, NSC, PPF and now savings account, all are seeing regular rate cuts. Therefore, these traditional investments are no longer suitable for your goals. With more rates cuts expected in the future it is advisable to consult a Financial Planner or use a Robo-advisory like MintWalkthat can help you re-look at other investment products like Mutual Funds to achieve your financial goals systematically and effectively.

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