Public Sector Banks Cut Savings Account Rates to Historic Lows

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How do the recent cuts in savings account interest rates by public sector banks compare to rates offered a few years ago?

The Declining Trend in Savings Account Interest Rates

Over the past year,a significant trend has emerged in the Indian banking sector: public sector banks (PSBs) are steadily reducing interest rates on savings account deposits. This decline has now reached historic lows, impacting millions of savers across the country.As of July 28, 2025, many PSBs offer rates between 2.75% and 3.5% per annum,a stark contrast to the 4% to 6% rates prevalent just a few years ago. This impacts savings account interest, bank deposit rates, and overall personal finance strategies.

Factors Driving the Rate Cuts

Several interconnected factors are contributing to this downward pressure on savings account rates:

RBI’s Monetary policy: The Reserve Bank of India (RBI) has maintained a relatively accommodative monetary policy stance to stimulate economic growth, leading to lower benchmark interest rates. This directly influences the rates offered by banks on both loans and deposits.

Surplus Liquidity in the Banking System: Following various measures taken by the RBI to inject liquidity into the market, banks currently have ample funds. With high liquidity, the incentive to attract deposits by offering higher interest rates diminishes.

Competition from Choice Investment Options: the rise of alternative investment avenues like mutual funds, stocks, and corporate bonds is reducing the reliance on customary savings accounts. Banks are responding by lowering rates to remain competitive in the lending market.

Lower Credit Demand: Reduced credit offtake from businesses and individuals also contributes to the surplus liquidity situation, further suppressing deposit rates.

Inflationary Pressures: While inflation has been relatively contained, persistent inflationary concerns can influence the RBI’s policy decisions and, consequently, bank interest rates.

Impact on Savers and the Economy

The reduction in savings interest rates has a ripple effect on both individual savers and the broader economy.

Reduced Returns on Deposits: Savers, notably senior citizens and those relying on fixed income, are receiving significantly lower returns on their deposits. This erodes the real value of their savings due to inflation.

Shift Towards Riskier Assets: The low returns on savings accounts are prompting some investors to explore riskier investment options in search of higher yields. This could potentially lead to increased volatility in financial markets.

Impact on Household Savings: Lower interest rates can discourage saving, potentially impacting the overall household savings rate in the country.

Bank Profitability: while lower deposit rates benefit banks by reducing their cost of funds, they also need to balance this with maintaining a healthy deposit base.

A Comparison of Savings Account Rates (July 2025)

Here’s a snapshot of savings account interest rates offered by some major public sector banks as of July 28, 2025 (rates are subject to change):

| Bank | Savings Account Rate |

| ——————– | ——————– |

| State Bank of India | 2.75% |

| Punjab National Bank | 3.00% |

| Bank of Baroda | 3.25% |

| canara Bank | 3.10% |

| Union Bank of India | 3.00% |

Note: These rates are indicative and may vary based on the deposit amount and other factors. Always check with the respective bank for the most up-to-date facts.

Alternatives to Traditional Savings Accounts

Given the current scenario, savers should consider diversifying their investment portfolio and exploring alternative options to maximize their returns.

Fixed Deposits (FDs): While FD rates have also declined, they generally offer higher returns than savings accounts. Consider laddering your FDs – investing in FDs with different maturities – to benefit from potential rate increases in the future.

Recurring Deposits (RDs): rds are a good option for disciplined saving, allowing you to deposit a fixed amount regularly over a specified period.

Mutual Funds: Investing in mutual funds, particularly debt funds, can offer potentially higher returns than traditional bank deposits. However, mutual funds are subject to market risk.

Small Savings Schemes: Government-backed small savings schemes like the Public provident Fund (PPF), National Savings Certificate (NSC), and Sukanya Samriddhi Yojana offer attractive interest rates and tax benefits.

Corporate Deposits: Deposits with reputable non-banking financial companies (NBFCs) can offer higher rates, but they also carry a higher level of risk.

Liquid Funds: These funds invest in very short-term debt instruments and offer relatively stable returns with high liquidity.

Case Study: The Impact on Senior Citizens

The decline in bank interest rates has particularly affected senior citizens who rely heavily on interest income from their savings. A 70-year-old retiree, Mr. Sharma, previously earned ₹24,000 annually on a ₹4 lakh savings account deposit at a 6% interest rate. With the current rate of 3%, his annual income has fallen to ₹12,000 – a significant reduction in his disposable income. This highlights the need for senior citizens to explore alternative investment options to supplement their income.

Practical Tips for Savers

Review Your Portfolio: Regularly review your investment portfolio and re