Over the past few days, many banks—both public and private—have slashed the interest rates offered on savings accounts. In some cases, these rates now hover below 3%. While savings accounts are seen as a secure way to park idle money, this trend raises a critical question: Are you actually losing money by keeping funds in your savings account?
The Silent Impact of Inflation
Inflation is the rate at which the general level of prices for goods and services rises, reducing purchasing power. For instance, if inflation averages 5% annually and your savings account yields just 3%, your real return is negative, precisely, a -2% return. This means that although your bank balance may increase nominally, the value of what that money can buy is shrinking over time.
In practical terms, the ₹100 in your account today may only buy goods worth ₹98 next year if inflation outpaces your interest earnings.
Opportunity Cost: The Hidden Price of Playing Safe
Another crucial concept is opportunity cost—the potential gains you forego by choosing one option over another. By holding large sums in a savings account, you’re potentially missing out on higher returns available through other low-risk financial instruments such as fixed deposits, liquid mutual funds, or even government bonds.
Although these alternatives may come with different levels of accessibility or risk, the difference in returns can compound significantly over time, especially for idle cash reserves.
Eroding Wealth in Real Terms
It is important to distinguish between nominal and real returns. Nominal returns are the interest you earn; real returns are what remain after factoring in inflation. If a savings account offers 2.5% interest and inflation stands at 6%, your real return is effectively -3.5%.
This erosion may not be immediately visible, but over the years it can result in significant loss of purchasing power, especially if substantial sums are left untouched in such accounts for prolonged periods.
Why Do People Still Park Money in Savings Accounts?
Despite low returns, savings accounts continue to attract deposits because of their convenience, liquidity, and safety. They offer instant access to funds and are insured up to a certain limit by deposit insurance schemes. For many, the peace of mind they provide outweighs the potential financial drawbacks, at least in the short term.
Read More: YES Bank Revises FD and Savings Account Interest Rates from April 21, 2025.
Conclusion
While savings accounts serve a vital role for daily transactions and emergency buffers, using them as the primary vehicle for storing short-term capital may not be the most financially sound choice. It is worth analysing the real value generated by such accounts, especially when inflation is high and interest rates are at historic lows.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. This does not constitute a personal recommendation/investment advice. It does not aim to influence any individual or entity to make investment decisions. Recipients should conduct their own research and assessments to form an independent opinion about investment decisions.
Investments in the securities market are subject to market risks, read all the related documents carefully before investing.
