19 - 09 - 2026

Stuck at the bottom: The Indian banking customers’ ‘2.50% floor problem’

“I’m not so much interested in the return on my money as I am in the return of my money” — is a line often cdited to the American humorist Will Rogers. Millions of Indian bank customers would soon be asking the same question, once they look deeper into their savings bank account returns.

When the Reserve Bank of India (RBI) deregulated savings deposit interest rates in October 2011, market forces were expected to usher in competitive pricing for retail depositors. For years, baseline rates at major banks held in the 3.50–4.00% range — as recently as FY18-19, savings rates at the top five major banks stood at around 4.00%.

Then came the quiet loosening — which allowed the band to compress steadily — falling to 2.70–3.00% by FY24-25, before collapsing further to a flat 2.50% in FY25-26 — the lowest savings yield since deregulation, and effectively a floor that no longer moves with the cycle.

For Indian bank customers, this rapid compression has landed at an increasingly inconvenient moment. The central bank’s own inflation target band runs 2–6%, with a 4% midpoint — and retail inflation has now climbed for several straight months, hitting 4.82% in August 2026, up from 4.45% in July, driven by higher food inflation.

Against a 2.50% savings rate, that puts the real return at roughly -2.3% before tax — worse than it was even a few weeks ago, and worse still once marginal income tax on interest is applied.

That gap, sitting quietly inside every retail savings account in the country, is the proverbial 800-pound gorilla — the “2.50% Floor Problem” — that most bank customers are either unaware of or choosing to look away from. And it is widening, not stabilising.

Some readers may find me overstating a simple problem with actionable solutions. But my issue is that the research and media houses call it whatever they want: for some, it is “the savings account interest rate squeeze” or “Current Account Savings Account or CASA compression,” while for others, it is “negative real returns on savings bank (SB) accounts.” Personal-finance writers would call it “the liquidity drag on retail savings.”

Agree on all counts — but these framings look innocuous when described outward from a bank’s balance sheet, rather than inward from the depositor’s account, or when framed rigidly around opportunity cost. None of these framings is wrong — but may I ask why banks have no incentive to move the rate up? Why are savers alone absorbing the rising inflation gap?

The dynamics behind the ‘floor’: The answer lies in CASA economics. Large commercial banks — with vast branch networks and deep retail trust — get a stable, low-cost pool of CASA balances. Latest RBI data shows that savings deposits with commercial banks have actually jumped 17.4% in FY25-26 alone, from ₹65.3 lakh crore to ₹76.7 lakh crore, the sharpest single-year rise in two decades.

On that base, the funding-cost advantage for banks is enormous — if the same ₹76.7 lakh crore had to be raised through term deposits, primarily fixed deposits, at the prevailing rates of 6.5–7%, the gap over the 2.50% savings rate would be around ₹3–3.5 lakh crore a year in avoided funding cost, dwarfing almost any other single financial lever that banks possess.

And banks aren’t just profiting from your lazy largesse — they’re actively billing customers for falling short of it: Indian banks collected ₹7,086 crore in FY26 alone in penalties for failing to maintain minimum average balances, part of a cumulative ₹26,000-plus crore haul over the preceding four years, with private lenders alone accounting for nearly ₹4,950 crore of that single year’s total.

That combination — a shrinking-but-still-massive low-cost deposit pool, a multi-lakh-crore funding advantage extracted from it, and a parallel penalty regime charging customers for not feeding it — is what keeps the 2.50% floor structurally undisturbed, regardless of what inflation is doing to the saver on the other side of the ledger.

Because millions of customers treat their primary savings account as an operational hub — for salary credit, bill payments, UPI — rather than an active investment vehicle, these balances are highly “sticky” even at unattractive rates.

The official data bears this out: savings deposits actually grew 17.4% in FY25-26, the sharpest jump in two decades, even as the rate itself fell to a record low. Depositors are not withdrawing in protest — they’re simply not shopping for a better rate. That inertia removes any commercial pressure on banks to compete on savings yield; the cost of retaining the money is lower than the cost of raising the rate.

By Sreevalsan M

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