How does inflation impact Savings Account interest rates?

In the complex financial world, the relationship between inflation and interest rates remains essential for policymakers, investors, and customers. Inflation is the rate at which the basic goods and services prices rise, decreasing the customers’ purchasing power despite the earnings. Interest rates, set by the Reserve Bank of India, can either stimulate or curtail inflation.

You can make informed financial decisions by understanding the intricate relationship between the interest rate on a Savings Account and inflation. The RBI employs the Consumer Price Index to gauge inflation rates in India. It is an accurate reflection of an average customer’s living costs.

How are inflation and interest rates related?

The accurate interest rate is a difference between the nominal and inflationary rates. For instance, if the bank offers 5% interest and the inflation rate is 3%, the real interest is 2%. It means your savings are growing by 2% annually after inflation. The central bank, or the RBI, actively manages the Savings Account interest rates to stabilise the Indian economy and control inflation. They use a set of tools, such as:

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Bank rates: These are the rates the RBI uses to lend money to commercial banks without security.
Statutory Liquidity Ratio: The percentage of all bank deposits like government bonds, gold, or other approved security forms maintained with the RBI is known as the SLR.
Open Market Operation: The sale and purchase of government securities in the banking system to adjust fund amounts in the open market is called open market operation.
Cash Reserve Ratio:It is the percentage of the total deposits that all banks should maintain as liquid cash with the central bank.
Repo rates:The central bank lends money to commercial banks against government securities for short terms at repo rates.
Marginal Standing Facility:It helps banks borrow funds from the RBI against government securities.

How does inflation affect the interest rates offered by banks?

The interplay between inflation and Savings Account interest directly impacts savers. When interest rates fall to stimulate spending and investment in the economy, saving becomes less attractive. The returns on Savings Accounts dwindle, and real returns might be negative after accounting for inflation. When interest rates rise to curb excessive inflation, saving becomes more enticing. You can always check your app for more details.

How to check them?

One of the best ways is to download their Banking app on your smartphone. It includes all the details about their offerings, interest rates, tenures, and other investments you might find valuable.

Conclusion

Understanding the dynamic between inflation and interest rates is the key to making the right financial decisions. If inflation is high and rates are low, invest your money in assets offering potentially higher returns than Bank Accounts. Monitoring them is key to unlocking smarter financial choices.

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