Shift in India’s Deposit Landscape

Syllabus: GS3/ Economy

Context

• According to the latest report of the Reserve Bank of India, Indian depositors are increasingly shifting their funds from low-interest savings accounts to higher-yield fixed deposits (FDs).

Key Trends Highlighted by RBI

• Declining Share of Savings Deposits: Savings deposits accounted for only 28.7% of aggregate bank deposits in March 2026, down significantly from 34.6% in March 2022.
  • Demand deposits (savings and current accounts) stood at ₹31.65 lakh crore as of May 2026.
• Rising Popularity of Fixed Deposits: Term deposits increased their share from 55.2% to 61.6% over four years and reached ₹225.23 lakh crore by May 2026.
  • Depositors are increasingly locking funds for longer durations to secure higher returns.
• Preference for Medium-Term Deposits: The share of deposits with maturity between 1 and 3 years increased from 50.4% in 2022 to 69.8% in 2026.
  • Deposits with maturity below one year fell from 16.7% to 8.8%.
• Dominance of Large Depositors: Deposits of ₹1 crore and above accounted for 46.3% of total term deposits as of March 2026.
• Household Savings Behaviour: Household savings continue to provide the foundation of India’s banking deposit base, accounting for 59.3% of total bank deposits at the end of March 2026.
• Diversification Towards Other Financial Assets: Many households are increasingly investing in mutual funds, equities, and other market-linked instruments to seek higher returns.
  • The growing diversification of savings reflects increasing financial awareness and participation in capital markets.

Why Are Indians Preferring Fixed Deposits?

• Low Interest Rates on Savings Accounts: Most major banks offer only 2.5–3% interest on savings accounts. In contrast, one- and two-year FDs offer around 6.25–6.45% returns.
• Negative Real Returns on Savings Deposits: When savings account interest rates remain below inflation, the real value of money declines.
  • With retail inflation around 3.48%, a savings account yielding 2.5% generates a negative real return.
• Banking Sector Priorities: Banks have been offering attractive FD rates to mobilize resources and fund credit growth, causing depositors to increasingly lock in medium-term funds (one to three years) to secure higher yields.
• Easy Accessibility: With the rise of net banking and mobile applications, anyone can open an FD with just a few clicks.
• Deposit Insurance: FDs are covered by the DICGC (Deposit Insurance and Credit Guarantee Corporation), which insures deposits up to ₹5 lakhs per depositor per bank, adding a layer of security.
• Convenient Liquidity & Loans: Investors can opt for tenures ranging from just 7 days to 10 years.
  • If immediate cash is required, investors can break the FD or take a loan/overdraft against the FD without losing all the benefits.

Implications for the Indian Economy

• Positive Implications: Higher fixed deposit mobilisation strengthens the resource base available for bank lending.
  • Greater household participation in financial savings contributes to financial sector deepening.
  • The shift towards interest-bearing instruments promotes more efficient allocation of savings within the economy.
• Emerging Concerns: Higher funding costs may exert pressure on banks’ profitability and lending rates.
  • The declining share of Regional Rural Banks in deposit mobilisation indicates increasing concentration of deposits in larger commercial banks.

Way Ahead

• Policymakers should encourage greater diversification of household savings across deposits, pensions, insurance, and capital market instruments to strengthen long-term financial security.
• Banks should develop flexible deposit products that combine higher returns with easier access to funds during emergencies.
• The growing shift towards fixed deposits should be complemented by deeper financial sector reforms that channel household savings into productive investments for economic growth.

Concluding remarks

• The shift from savings accounts to fixed deposits reflects households’ preference for higher and more stable returns amid low savings account interest rates and inflation concerns. 
• While market-linked SIPs are gaining popularity, the safety, predictability, and assured returns offered by fixed deposits continue to make them a cornerstone of Indian saving habits.

Source: IE