How To Earn The Highest Interest Rate On Savings?

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During my internship in France in 2017, I opened a current account with Société Générale bank. I was really surprised to know that the European banks don’t pay any interest on the current account. Further, the interest rate on savings account was a mere 1%.

I was used to receiving 4% annual interest on my current bank account and 7.5% on savings account in India (2017). When I compared that to the bank interest rate on savings by European banks, I was startled.

Why Do European Banks Pay Low Interest Rate on Savings?

On digging deep, I found that the interest rate has been declining in Europe for the last 20 years. In fact, the real interest rate has been negative since 2014.

Note: Real interest rate=Nominal interest rate-Inflation rate

Low interest rate on savings in Europe can be attributed to primarily, the low inflation rate and the requirement to make cheap credit available to businesses.

1. Low Inflation Rate

India and several other emerging economies have higher inflation rates compared to European countries in the EU zone and the US. If you look at the BRICS nations, Brazil had an inflation rate of 3.4%, India 3.6%, and Russia 3.7%. On the other hand, European countries like Italy, France, and Germany have inflation rates of 1.3%, 1.2%, and 1.7% respectively.

Inflation Rate by countries as of January 1, 2020 (Source: Indexmundi)

The inflation rate and bank interest rate have an inverse or opposite relationship.

The money paid by the banks as interest on savings of depositors comes from the interest charged by them on the loans to the borrowers.

Thus, you might have found that housing loans or educational loans have higher interest than the interest paid by the banks. For example, the interest rate for housing loans in India was 9.5% in 2017 while the banks were paying out 7.5% interest on a deposit account.

Banks can also increase interest rates (both on deposits and loans) if inflation climbs up steeply. These rates are determined by the central banks of respective countries. The graph below shows how inflation and bank interest rates are correlated.

CPI=Consumer Price Index (Inflation) versus Interest Rate in the US (Source: Investopedia)

2. Deflationary Spiral

Photo by Darwin Vegher on Unsplash

Negative interest rate was introduced for the first time in Sweden in 2009. Since then European Central Bank (ECB) and Japan have followed the suit.

The European Central Bank (ECB) introduced negative interest on savings/deposits in 2014 to ensure that Europe doesn’t escalate into lower production, decreased demand and lower wages.

A negative interest rate encourages businesses and entrepreneurs to borrow and thus, expand their businesses. It is an incentive to borrow money and undertake infrastructure projects. This leads to an increase in overall ‘business volume’ which in turn leads to higher productivity and a flourishing economy.

Interest Rate on Savings By Countries

Here is a comparative analysis of the interest paid by various central banks in 2021. (Note: Interest rates have fallen to historical lows during the pandemic in 2020–21)

interest rate on savings by country
Interest rates set by different central banks as of May 03, 2021. Bank of Japan has a negative interest rate of -0.1%, ECB has an interest rate of 0% and Reserve Bank of India 4%(Source: Investing.com)

Thus, you can observe that the interest rate on deposits in European banks is lower than in Indian banks due to the low inflation rate in Europe and the negative/zero interest rate set by the ECB.

Nevertheless, the interest rate paid out by the European Banks (0% or 1% in some instances) is lower than the inflation rate in the EU, which essentially means that the money keeps getting devalued year-over-year. 

Banks should pay interest rates at least equivalent to the rate of inflation.

What About Currency Devaluation in Emerging Economies?

Emerging economies like India offer a higher interest rate on savings.

Although the higher interest rate is a motivating factor to earn in Euros and save in Indian rupee (INR), one needs to analyze the rate of Indian rupee (₹) depreciation and bank-specific risks.

If the rate of depreciation of the Indian Rupee (₹) exceeds the interest rate paid by the Indian banks, there is no point in holding the money in INR (₹). Thus, I analyzed the rupee depreciation in the next section.

How Fast Does The Indian Rupee Depreciate?

US Dollar (USD) and Euro are considered as safe haven currencies, meaning they are more likely to retain their values during market turbulence, say a financial crisis.

Indian rupee (INR) is susceptible to the prices of crude oil. India is the third-highest consumer of crude oil and the major bulk of this oil is imported.

Since the crude oil price is set in USD, it weakens the rupee against USD and other safe haven currencies with rising oil prices. Thus, INR depreciates against the USD and Euro if the price of crude oil goes up.

Here is the exchange rate for Euro to INR in the last 10 years.

euro/INR exchange rate over one dacade
EUR/INR exchange rate for the last 10 years (Source: Trading Economics)

You can see how INR strengthened when the prices of crude oil crashed in 2014. Ever since then the rupee has weakened slowly.

If you look at the EUR/INR graph above, the average Y-O-Y depreciation of INR against the EUR is nearly 3.27% for the last 5 years compounded annually. The Euro/INR exchange rate increased from ₹76 in May, 2016 to ₹90 in May, 2021. 

Since crude oil prices are likely to increase over time, the rupee might continue to decline. However, the rise in oil prices is not anticipated to be steep

Thus, I observed that the rate of currency devaluation for India (3.27%) is actually lower than the inflation rate (3.6%). It is important to note that crude oil import-export trade imbalance and inflation-interest rate difference is not the only factor that contributes to devaluation.

Here are the factors responsible for depreciation of a currency:

  • Political instability
  • Inflation rate-interest rate differential
  • Import-export trade imbalance
  • Risk aversion among investors
  • Economic fundamentals like debt to GDP ratio

When I look at these factors, India is well-poised for growth. Indian investors have started to take risks in the last one decade and the Indian stock market has been among the top 5 global performers over the last one decade.

Conclusion

I weighed both the factors in favour and against Euro/Rupee exchange rate.

EUR/INR conversion rate on May 03, 2021 (Source: Google Finance)

I found that if I factored the 3.27% in annual rupee depreciation, nearly 1.5% European inflation, 0% interest rate on my savings bank account in Europe, at least 7% in savings bank interest in India, the net annual profit in EURO/INR conversion and saving it in INR would be 5.23% (7%-3.27%+1.5%). Moreover, Indian banks allow you to lock in the interest rate for a specific time period.

Personally, I save my European remuneration in INR as I can get higher interest on savings in India. Since I have Indian citizenship, I hold my savings in India.

But if I had the means, I would have explored greener pastures. The next section talks about countries other than India which provide higher interest rate on savings.

Where Else To Get Higher Interest Rate on Savings in 2021?

If you are a savvy investor, you should always look ways to find the best deal for you. Therefore, I also decided to explore a few other destinations where one can find higher interest rates on savings.

Based on my research Turkey, Mongolia, Georgia, Panama and Zambia offer interest rates over 8% which is higher than India.

1. Georgia

USD/Georgian Lari depriciated from 2.29 to 3.46 over the past 5 years. That’s a depreciation of 51%

Georgia National Bank provides an interest rate to 8.5% for holding the deposits in local currency Georgian Lari. Some local banks even provide an interest rate of over 9.5% for deposits in Georgian Lari.

However, if you hold the deposit in USD, the interest provided by the Georgian banks is just 3-3.5%.

Although this sounds lucrative, the currency devaluation rate in the past 5 years is 8.75% Y-o-Y compounded annually. Georgia has an inflation rate of 5.25% as of 2021 (See the chart below).

Inflation rate in Georgia averaged annually. (Source: Statista)

Why you shouldn’t keep your deposits in Georgian Lari?

Map - Georgia
Georgia’s two neighbouring trading partners Russia and Turkey are also under turbulent times due to COVID-19. This affects the Georgian economy.

Georgian economy is now going through a turbulent times.

Ever since the pandemic broke hell on the tourism sector, the country has found it hard to revive its economy. Tourism and hospitality sector contributes to over one-third to the overall GDP. Thus, unlike the Indian economy, the Georgian economy is heavily reliant on one sector and thus faces the risk of lack of diversification.

The second important factor is the free fall of Turkish Lira and Russian Rouble. Russia and Turkey are the two important trading partners of Georgia. The currency devaluation in the neighbouring countries affects the economy of Georgia.

2. Panama

Panama is a hub for the banking sector. It’s a country with very low capital gains tax and it’s a country infamous for money laundering. Although it has its own currency, Balboa, the banking sector operates on USD.

Banks in Panama pay an interest rate of 4%-4.5%. This is definitely a lucrative rate considering the political stability in the country. If you have the means, Panama should be on the top of the list for parking your saved money.

About Post Author

SurajPanigrahi

I started this blog for my love of writing and disseminating my views on things that excited me. I don't have a clear direction with this blog. However, you can find content mostly related to higher education, career development, MedTech, finance, and budget travel hacks. Background: After graduating in Mechanical Engineering from IIT (BHU) Varanasi, India, I pursued a dual degree Master's program in Europe (MS in Biomedical Engineering at RWTH Aachen, Germany and MS in Bioengineering at Trinity College Dublin, Ireland). I am currently working as a 'Manufacturing Engineer' in a MedTech company in Ireland.
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