Will your bank account now make more money?

Apr 29, 2011

In this issue:
» Mutual fund mergers not so good for investors
» Phone rates in India to come down further?
» Silver loses shine for its users
» US Fed cannot stop a bull run: Mark Mobius
» ...and more!

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Most investors look at investing their earnings in profitable investment destinations. They look at stocks, commodities, mutual funds, anything that would help them earn handsome returns on their money. They are even willing to take risks to earn these returns. Risks that during volatile times, lead to substantial losses. So why not just leave their money in their respective bank accounts. The reason against this is quite obvious. Because saving bank accounts give almost negligible returns. This is in fact very true as most saving bank accounts give an interest rate of a mere 3.5%. This is lower than the rate on a fixed deposit. And if you compare it with the current inflation rate you end up losing money in savings account rather than making money.

So what if we tell you that if the Reserve Bank of India's (RBI) proposal is accepted then this rate would actually go up? That's right. RBI Governor, Mr. D Subbarao has proposed to 'free the savings rate'. Currently the saving bank interest rates are regulated by the RBI. The reason behind this was to allow people of the weaker sections of the economy earn some returns on their money. If the saving bank rates are deregulated, then it would lead to higher savings rate especially during times such as now when interest rates are on an uptick. Deregulation of the rates would also help the RBI in implementing its policies over the long term as the bank rates would move more easily in the direction set by RBI.

So all would be hunky-dory in the event of rising interest rates. Investors would be happy with higher rates on their savings bank accounts. RBI would be happy as their policies would start to have an effect. Banks would become competitive as they vie for more customers. Each would try to come up with different rates and products to woo the investors. But there are two sides to every coin and there are cons to freeing the rates as well. For instance what would happen in the event of lower interest rates? The interest on the savings bank account would come down as well and may even end up below the current rates.

Do you think saving bank interest rates should be deregulated in India? Share your comments with us or post your views on our facebook page.

 Chart of the day
The Population Census of 2011 is complete and the results are out. There has been an increase in India's population over the past 10 years. But then again, this does not come as a surprise. But the interesting part is the result related to the literacy rate in India. India's literacy rate now stands at 74% which is considerably higher as opposed to the 65% seen in 2001. Considering the pace of technology as well as the quantum of investment made by the Government towards promoting education, it is commendable to see the rise in literacy rates. However, if one delves into the meaning of 'literate' in India, it is not a very bright picture. Anyone who can write one's own name is considered to be literate by this definition. It is not very encouraging to know that the definition of literate is so loosely used. Nevertheless, it is heartening to see that the Governments efforts are yielding better results. We just hope that this number would touch a 100% when the results of the next Census come out.

Data source: Ministry of Human Resource Development of India

What happens when a mutual fund scheme in which you have invested gets merged with some other scheme? While such mergers may augur well for the mutual fund industry, the same cannot be said for unit holders. Let us explain that to you.

Every investor knows that selling stocks or mutual fund units of equity funds in less than a year entails short term capital gains tax of 15% (excluding cess). Now, when one scheme is merged with another, the former ceases to exist. In that case, the units of the first scheme are redeemed. Then without returning the units to investors, the same are reinvested into the new scheme.

This is as good as an investor redeeming units from one fund and investing into another. So keep in mind that such mergers are nothing to cheer about and may just add some unnecessary liability on your shoulders.

Economies of scale surely come in handy for companies in a wide variety of sectors. The telecom sector is no exception to this rule. Just try and ask big companies like Bharti Airtel and Idea Cellular. There is a concept in the sector called as inter connect charge. This is nothing but a charge paid by the mobile operator from whose network a call originates to the mobile operator on whose network it ends. Now, consider the subscriber population of big companies like Airtel and Idea to those of other smaller players. The fact that these companies corner a large chunk of these charges and thus, earn huge profits from it surely doesn't need any more explaining. However, it now appears that TRAI, the regulatory body for the telecom sector is looking to snatch this advantage away from the larger players or perhaps weaken it severely. In its long awaited review of the interconnect charges, it has proposed deep cuts in charges paid by operators to each other. Quite expectedly, the move has not gone down well with larger players and is again likely to create a divide between them and the small players. For the consumers though, it could herald an era of still lower mobile tariffs.

Gold has found its place under the sun with stronger currencies losing much of their sheen. The money printing machines are working round the clock. Inflation in developed and developing nations is emerging as one of the biggest economic threats. Hence, the fall in gold prices does not seem a very near term possibility. But its inferior counterpart, silver, has also raised as many eyebrows. Prices of the white metal skyrocketed 84% in 2010. After that it went up another 54% so far in 2011. Much of the recent rally has been fueled by investors who are piling into exchange-traded funds. They are using it to hedge themselves against inflation or currency declines. Hence, while investors are looking for more ways to invest in this precious metal, users of the metal have had a tough time.

Unlike gold, silver has plenty of industrial uses. Three fourth of the world's silver is used for making jewelry, mirrors, solar panels, plasma televisions etc. Hence the producers of these items are desperately looking for silver substitutes. Not that they have found any feasible solution yet, but the desperation to reduce dependence on the metal may bring down silver demand. Even the silver miners are worried whether they can sell more of the metal at current rates. Hence if you are amongst those who are betting on the silver rally, make sure that you keep your exposure very limited.

The global equity markets are facing a lot of uncertainty right now. One of it is the fear that once the Fed halts its bond purchase program, equities will fall. After all, the so-called recovery in the US has been fuelled by quantitative easing and any attempts to ease it would push the US economy back into the hole. But Mark Mobius of Templeton Asset Management thinks differently. He opines that the global equities bull market will weather any halt in bond purchases by the Federal Reserve. This is because of rising US consumption and investment in emerging markets. Mobius believes that another round of quantitative easing is not necessary and that there will not be an economic slump in the second half of the year. He admits that although consumption has not picked up at a furious space, Americans have nevertheless started spending. We are not so sure about the US economy really recovering. Unemployment there is still quite high and whether the spending that is being witnessed now can be sustained remains to be seen. What is certain though is that another round of quantitative easing by the Fed will only make matters worse for the global economy.

The Indian stock markets fell into the negative territory after posting marginal gains in the opening hours. At the time of writing, the benchmark BSE Sensex was trading lower by 68 points (0.3%). Capital goods and realty stocks were the maximum losers while those from the FMCG and healthcare space were trading firm. Most of the Asian stock markets ended in the red with China being the only exception.

 Today's investing mantra
"It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." - Warren Buffett

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26 Responses to "Will your bank account now make more money?"

P T Cherian

Apr 30, 2011

Give banks the freedom to increase SB interest rates according to their needs to increase SB deposits, keeping the present rate (3.5%) as a minimum.


Shreyas Shah

Apr 29, 2011

The fixing of iterest rate at savings account is to protect the small investor from the intricacies of financial markets risk. The small investor is able to take returns on his investments, though less, but protected. Be ware!!! The government role is to protect the common man, and no to leave him to the mercy /exploitation of the big houses...Keeping the interst rate floating with market, he is at the risk of market. In fact, it should be better that the interest rate may be revised.


Nagesh Kini

Apr 29, 2011

Yes, in deed. This hike is long overdue for the simple reason most people have no choice but to park their hard earned funds in readily available and accessible savings bank accounts with friendly neighbourhood banks to enable them to draw upon them in cases of medical emergencies and family travel. this is more true for the elderly.
The current 3.5% is peanuts and needs to be suitably hiked with a minimum differential to the shortest of the term deposits.
For the bank CASA are possibly the cheapest funds and now the time has come to reward them too.There will be a rate war and may the highest interest payer win! So far so good for the food inflation hit aam nagrik! Mera Bharat Mahhan, Jai ho!


Ganesh K

Apr 29, 2011

All banks will gang up and reduce saving bank account interest.So that flow of money goes to FDs because people will keep only required amount in SB account and transfer rest to FDs and bank will have money for long term lending and make more profit. So RBI should free the SB interest rate with lower limit of 3.5 %.


Radhakrishna Rao

Apr 29, 2011

Yes ,There should not be scope for discriminatory rate of interest for SB Balance of moderate amount of Middle class and competitive rate for High-networth Individuals as envisaged by Mr O P Bhat of State Bank of India.



Apr 29, 2011

Since savings bank accounts are not really portable and thereby limiting the flexibility to the retail customers, RBI should setup a floor rate (reviewed periodically along with inflation as well as average cost of capital) below which no bank should provide interest on savings accounts.



Apr 29, 2011

All Saving Bank accounts wshould be converted to a " Flexi " Account. Here one would get interest on the Fixed deposit rates but would leAVe the flexibility to the user to use this flexi account as a Saving s Bank Account only the balance would get interest at the fixed deposit rates. Some Banks already have such a scheme. All banks should introduce this Scheme with immediate effect


Sarath Chandra

Apr 29, 2011

Whether freeing up interest rates on Savings Accounts is going to increase the returns to account holders (as projected by RBI and almost every section of Media) is debatable.

A simple question is: why will Banks shell out high interest rates (per market conditions)? No business gives away money just so easily. No matter whatsoever soothing like that.

Profit maximization practises of Banks are widely known and experienced by every single customer. Just a couple of them for a record here:

1. how many Banks really honestly reduce rate on floating rate loans (with market)? However, similar inertia does not exist when raising the rates.

2. how beautifully Banks have given away virtually zero interest rate based on the 'Minimum Balance Clause', even in the so called Regulated Regime?

It will be good to see RBI keeping a compulsorily regulated floor, the floor being HALF that of Inflation (per Government statistics). Upside can be left free. Such an implementation at least protects the interest of existing account holders. Banks will have to pay higher interest during inflationary conditions; and thus get forced to take up an active role in the management of Inflation along with RBI.



Apr 29, 2011

Dose deregulation also mean that there can be decrease in interest rate, that is from 3.5% to 2% or even no Interest on Saving Bank account as in USA very less 0.05%,

as people feel that it is safe to keep Money in saving account than to Invest in any other Investment Option?????



Apr 29, 2011

Its very unlikely that banks will let the customers benefit from deregulation of savings bank rates. Low savings interest rate helps bank improve the bottomline. Also, from the experience of Mobile Number Portability experience, we can safely assume anyone would change the Banker due to low savings bank interest rates. Even higher FD rates offered by mid cap banks dont result in wholesale switchover to these Banks. Air Passengers have seen air ticket rates go up in rush season, but not decline in same proportion in case of decline in trafiic. Customers will face lower than current rates when interest rates bottom out, but will not see much rise when rates go up. Wont it make sense, if RBI defines Base rates and banks have a window of 0.5% around that rate ?

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