Banks cut savings rates post-RBI cut: Time for investors to explore better-yield options?

Several banks have slashed interest rates on savings accounts following the Reserve Bank of India’s recent repo rate cut, prompting concerns about the diminishing appeal of these accounts as a parking space for short-term funds.

In its April monetary policy, the RBI cut the repo rate by 25 basis points—the second reduction in a row—to stimulate economic growth amid global uncertainties triggered by fresh US tariff measures. As a result, banks have revised both lending and deposit rates downward.

HDFC Bank, for instance, has reduced its interest rate on savings accounts from 3 percent to 2.75 percent for deposits of up to Rs 50 lakh, effective April 12. For deposits above Rs 50 lakh, the rate has been adjusted to 3.25 percent. This is the first time the bank has brought rates down to these levels since the COVID-19 outbreak in June 2020.

India’s largest lender, State Bank of India (SBI), now offers a 2.7 percent return on savings deposits below Rs 10 crore, and 3 percent on deposits above that limit. The bank has also trimmed fixed deposit rates across various tenures.

“In response to the RBI's repo rate cut, some banks have reduced their savings account rate. This may initially lead to slight movement of funds from these accounts to other financial institutions or term deposits in search of higher returns,” Sanjay Agarwal, senior director, CareEdge Ratings, told Moneycontrol.

Despite the decrease in interest rates, analysts believe that there may not be a substantial change in depositor behavior due to the overall market instability. With the current volatility and uncertainty in the macroeconomic environment, individuals are more likely to keep emergency funds in their savings bank accounts.

While savings accounts traditionally offer lower returns, steep rate cuts can prompt some depositors to consider alternatives like fixed deposits, debt instruments, mutual funds, or equities in search of better yields. However, with falling stock prices and rising bond yields due to global instability, many may still choose to keep part of their funds accessible and safe in savings accounts.

To counter the outflow of funds, banks may start focusing on offering differentiated features and services to retain customers, even as interest rates continue to hover near multi-year lows.

The banking system has also witnessed movement of funds by customers from savings account to other instruments, and in August 2024, then RBI governor Shaktikanta Das had asked banks to offer innovative products and services and effectively use their branch networks to attract household savings as deposits.

Analysts said that the lower rates of deposits offered by banks now will have an impact on the CASA (current account/savings account) ratio of a bank. CASA refers to low-cost deposits, and the ratio has been lagging for over a year now. It is expected that banks' first-quarter results will reflect this.

Are debt funds a go-to option?

With banks cutting interest rates on savings accounts, market experts believe that short-term debt instruments like liquid, money market, and overnight funds are becoming increasingly attractive for investors seeking better returns on idle cash. Market experts feel bank deposit rates have decreased, prompting investors seeking liquidity and slightly higher returns to consider short-term debt funds as a more attractive option.

However, despite their appeal, liquid funds witnessed significant outflows in March. According to data, liquid funds saw a sharp withdrawal of Rs 1.33 lakh crore in March 2025, compared to inflows of Rs 91,592 crore in January and Rs 4,976 crore in February. For FY25 so far, liquid funds have still seen net inflows of Rs 38,348 crore.

Money market funds, on the other hand, continued to attract investors, registering inflows of Rs 66,581 crore during the same period. 

The steep outflows from liquid funds in March, however, are seen as seasonal and not a structural concern. 

As interest rates on savings accounts trend lower, such fund categories could see renewed investor interest in the coming months, especially among those looking to balance safety, liquidity, and returns.