In early April, top Indian banks, including HDFC Bank, ICICI Bank, and Axis Bank, slashed their savings account interest rates by 25 basis points, bringing them down to 2.75%. Analysts suggest that this move is aimed at lowering banks’ cost of funds, following the recent RBI repo rate cut and its cascading effect on lending rates, particularly home loans.
Savings accounts have long been seen as the safest place to park money. But with interest rates dropping and inflation climbing to 5% annually, it's worth asking: Is your money really growing in a savings account anymore? In this article, we’ll break down how savings accounts are making you poorer and explore smarter alternatives to help your money work harder for you.
Why Have Banks Slashed Savings Rates?
Banks primarily earn through their net interest margin. This is the difference between the interest they earn by giving out loans and the interest they pay on deposits. Recently the RBI (Reserve Bank of India) cut the repo rate. Repo rate is essentially the rate at which banks borrow from RBI. As a result, the interest rate on loans like home and personal loans have also come down. We’ve explained the impact of repo rate cuts in this article here.
Now, the decline in interest rates on loans put a pressure on banks’ profitability, because they will now earn less from the loans they give out. To manage this situation, banks are lowering the interest they pay on savings accounts. This will reduce their overall ‘cost of funds’. In simple terms, it will now be cheaper for banks to hold their money.
How Is Your Savings Account Making You Poorer?
Years ago, a savings account may have been a decent place to park your funds, but not anymore. With savings rates dropping to just 2.75% and inflation running at 5% annually, your savings are now struggling to keep pace and are steadily losing value over time.
To better understand the impact of inflation on your savings, let’s look at a simple example.
Suppose a piece of furniture costs ₹1,00,000 today. A year later, due to 5% inflation, the same piece would cost ₹1,05,000. A ₹5,000 increase purely because of the rise in prices across the economy.
Now, assume you deposited ₹1,00,000 in a savings account:
- At an interest rate of 2.75%, your earnings would be ₹2,750 (₹1,00,000 × 2.75%).
- After paying 30% tax on the interest, your net return would fall to ₹1,925.
This means after one year, your savings would grow to ₹1,01,925, while the furniture’s price would have risen to ₹1,05,000. In short, you would be ₹3,075 short.
This is how your money quietly loses value in a savings account. Here’s a quick look at the post-tax returns offered by top Indian banks:
| Bank Name | Saving Rate | Tax Rate | Post Tax |
| HDFC Bank | 2.75% | 30% | 1.93% |
| ICICI Bank | 2.75% | 30% | 1.93% |
| SBI | 2.70% | 30% | 1.89% |
| Axis Bank | 2.75% | 30% | 1.93% |
| IndusInd Bank | 5% | 30% | 3.50% |
| RBL Bank | 5.50% | 30% | 3.85% |
| PNB Bank | 2.70% | 30% | 1.89% |
| Bank of India | 2.75% | 30% | 1.93% |
What Does Falling Savings Rate Mean For You?
A falling savings rate not only means low returns on your deposits it also means high opportunity costs. By keeping money idle in your savings account you lose out on potential returns had you placed it in an investment vehicle with better returns.
Earlier, people would meet their short-term goals with a savings account, but now with the rising inflation rate it is now more difficult to grow wealth in a savings account than anything else. If anything you are losing money.
Which brings us to the next big question: Where should you park your money instead?
Where Should You Park Your Savings Instead?
While savings accounts have always been seen as a safer investment choice, the rising inflation cost and falling interest rates is making you lose money. There are smarter alternatives available today, ones that offer high-post tax returns while keeping your money relatively secure. Depending on how long you stay invested you can explore mutual funds like:
- Liquid Funds
Liquid Funds is a debt mutual fund that invests in short-term securities that mature within 91 days. The term ‘liquid’ reflects easy accessibility of the fund. They invest in T-bills, Commercial Paper, Certificate of Deposits, etc.
- Arbitrage Funds
Arbitrage Funds are a type of mutual fund that earn returns by taking advantage of price differences for the same stock in different markets, mainly the cash market (spot market) and the futures market. Since these trades are typically hedged (buy and sell simultaneously), the risk of large losses is very low compared to pure equity funds.
- Long Duration Debt Funds
Long Duration Debt Funds debt mutual funds that primarily invest in bonds and fixed-income securities with longer maturity periods, typically more than 7 years. Long duration funds have a higher allocation to government securities.
How To Choose The Right Mutual Funds For Your Savings?
The right mutual fund for you can depend on your investment goal, risk tolerance and time horizon. For this purpose, let’s consider different investment periods and see which mutual fund fits best.
For 3 to 6 months - Liquid Funds
If your investment horizon is between 3 to 6 months, meaning you want to park your money temporarily then Liquid Funds can be an excellent option. Since these funds invest in securities that mature within 91 days, they offer low-risk, high liquidity, and better returns than a savings account for short-term goals.
To get an idea of the potential returns, here’s a look at the post-tax returns of the top 5 liquid funds, sorted by their Asset Under Management (AUM):
| Funds | AUM (in Rs. cr) | Return (%)1 yr | Post Tax Return (%) |
| SBI Liquid Fund-Reg(G) | 54,569 | 7.19% | 5.03% |
| HDFC Liquid Fund(G) | 50,518 | 7.27% | 5.09% |
| ICICI Pru Liquid Fund(G) | 42,293 | 7.28% | 5.10% |
| Aditya Birla SL Liquid Fund(G) | 41,052 | 7.30% | 5.11% |
| Axis Liquid Fund-Reg(G) | 32,609 | 7.32% | 5.12% |
Suppose you invest ₹10,00,000 in a liquid fund offering a 7.32% pre-tax annual return. Here’s what your return would look like:
- Pre-Tax Earnings = ₹10,00,000 × 7.32% = ₹73,200
- Tax Payable (assuming 30% tax slab) = ₹73,200 × 30% = ₹21,960
- Post-Tax Earnings = ₹73,200 - ₹21,960 = ₹51,240
At the end of one year, your investment would grow to ₹10,51,240. This means your money would earn ₹51,240 after taxes, which is significantly higher than what you’d get from a savings account returning just 1.93%.
For 6 to 12 months - Arbitrage Funds
If you are planning to park your investment horizon for 6 to 12 months, Arbitrage Funds can be considered. To share a broader perspective, this is what the post-tax returns of top Arbitrage Funds ranked by their AUM look like:
| Funds | AUM (in Rs. cr) | Return (%)1 yr | Post Tax Return (%) |
| Kotak Equity Arbitrage Fund(G) | 60,373 | 7.43% | 6.50% |
| SBI Arbitrage Opportunities Fund-Reg(G) | 30,592 | 7.25% | 6.34% |
| ICICI Pru Equity-Arbitrage Fund(G) | 25,727 | 7.36% | 6.44% |
| Invesco India Arbitrage Fund(G) | 19,675 | 7.33% | 6.41% |
| HDFC Arbitrage-WP(G) | 18,350 | 7.32% | 6.41% |
Consider you invested 10,00,000 in an arbitrage fund that generates 7.43% returns annually. This is what your return at the end of the year would be:
- Pre-Tax Earnings = ₹10,00,000 × 7.43% = ₹74,300
- Tax Payable (Taxed as Equity Fund, Up to 1.25 Lakh exempted, then 12.5% under LTCG) = ₹74,300 -1,25,000= ₹0
- Post-Tax Earnings = ₹74,300
At the end of one year, your investment would have grown to ₹10,74,300. This means your money would earn ₹74,300 after taxes.
For 12 months to 36 months - Long Duration Funds
If your investment horizon is between 1 to 3 years, Long Duration Funds can be a strong alternative to savings accounts. While they do carry some interest-rate risk, they have historically generated better returns than a savings account.
| Funds | AUM (in Rs. cr) | Return (%)1 yr | Post Tax Return (%) |
| Nippon India Nivesh Lakshya Fund(G) | 9,659 | 12.78% | 8.95% |
| HDFC Long Duration Debt Fund-Reg(G) | 5,569 | 13.20% | 9.24% |
| SBI Long Duration Fund-Reg(G) | 2,982 | 12.91% | 9.04% |
| Kotak Nifty SDL Apr 2032 Top 12 Equal Weight Index Fund-Reg(G) | 2,943 | 11.74% | 8.22% |
| SBI CRISIL IBX Gilt Index - June 2036 Fund-Reg(G) | 2,508 | 13.14% | 9.20% |
Let’s understand your returns with an example. Say you invested 10,00,000 in a long duration fund that generates 9.20% returns annually, this is how much your post-return tax would have been:
- Pre-Tax Earnings = ₹10,00,000 × 13.14% = ₹1,31,400
- Tax Payable (Assuming 30% tax slab) = ₹1,31,400 × 30% = ₹39,420
- Post-Tax Earnings = ₹1,31,400 - ₹39,420 = ₹91,980
At the end of one year, your investment would have grown to ₹10,91,980. This means your money would earn ₹91,980 after taxes.
Final Thoughts
With savings account rates falling and inflation steadily eating into your money’s real value, it's no longer enough to let your savings sit idle. Smarter alternatives like Liquid Funds, Arbitrage Funds, and Long Duration Funds offer a balance of low risk, better returns, and reasonable liquidity depending on your investment horizon.
Disclaimer:
This blog is for general/educational information purposes and is no way to be considered as advice, or recommendation for investment or otherwise. Mutual Fund investments are subject to market risks, read all scheme related documents carefully before investing. Tracking services are not exchange traded product. INDstocks is merely acting as a distributor of Mutual Funds. INDstocks Private Limited (formerly known as INDmoney Private Limited) 616, Level 6, Suncity Success Tower, Sector 65, Gurugram, 122005, SEBI Stock Broking Registration No: INZ000305337, Trading and Clearing Member of NSE (90267, M70042) and BSE, BSE StarMF (6779), AMFI Registration No: ARN-254564, SEBI Depository Participant Reg. No. IN-DP-690-2022, Depository Participant ID: CDSL 12095500, Research Analyst Registration No. INH000018948, BSE RA Enlistment No. 6428.