Indian Banks Face Pressure to Hike Fixed Deposit Rates Amid Rising Inflation and Credit Demand

Fixed deposit (FD) investors are on the lookout for high interest rates after experiencing the lowest-rate cycle following the coronavirus pandemic. The possibility of interest rates going up is linked to high inflation, which is one of the trigger points for banks to raise deposit rates.

India’s retail inflation, as measured by the consumer price index, for July 2026 hasn’t been released yet, but recent data shows that inflation is climbing. In June 2026, it hit 4.38%, up from 2.74% in January. At 4.38%, the June inflation rate was already above the Reserve Bank of India’s (RBI) target of 4%. it’s edging closer towards the upper tolerance band of 6%.

As the RBI prepares for its Monetary Policy Committee (MPC) meeting with a repo rate decision set for Friday (August 6, 2026), they might hold off on increasing the rate for now. However, a rate hike in the near future is still a possibility, especially with inflation likely to rise amid the Iran-US war. A rising inflation is also considered as an indicator of a fixed deposit (FD) interest rate hike. Banks usually pick short-to-medium term deposits first and then raise long-term FD rates.

But as we talk about the possibility of an FD rate hike, it’s not just high inflation that supports the idea, but also a number of other factors like high credit demand, subdued deposit growth, rising yield on 10-year G-Securities (G-Sec) bond and competitive interest rates from small savings schemes, all suggesting that banks may be compelled to raise interest rates if this trend continues.

While it’s hard to predict how long it will take for banks to raise FD rates, here we will discuss a few points that indicate that a rate increase is a real possibility.

Rising inflation

How retail inflation has risen in the past few months can be gauged from the fact that in October 2025, it was 0.25. It rose to 1.33 in December, 3.4 in March 2026 and 4.38 in June.

Adhil Shetty, CEO, BankBazaar.com, told ET Wealth Online that geopolitical tensions arising from Iran-US conflict and concerns around the monsoon piled on the inflationary pressure.

Anand K Rathi, co-founder, MIRA Money, says energy shock and higher crude oil prices made transportation more expensive, which also made inflation worse.

How long inflation keeps rising, Shetty says, will depend on the progress of the monsoon, food supply conditions, crude oil prices and global developments.

CPI inflation since October 2025 Month | Inflation rate Oct-25 | 0.25% Nov-25 | 0.71% Dec-25 | 1.33% Jan-26 | 2.74% Feb-26 | 3.21% Mar-26 | 3.40% Apr-26 | 3.48% May-26 | 3.93% Jun-26 | 4.38%

When inflation rises above the RBI’s comfort zone of 2-6%, the central bank reacts by increasing the repo rate. However, it may not be possible in the immediate future just by looking at the last two months’ inflation data. However, going forward, if inflation remains elevated over the coming months or moves closer to 6%, the possibility of a repo rate hike would increase.

When the RBI raises the repo rate, it may provide some cushion for banks to increase FD rates on some of its deposits.

Top 5 highest FD rates (public sector banks) Bank | Highest FD rate | Tenure Bank of India | 6.85% | 999 days Punjab & Sind Bank | 6.85% | 666 days Indian Bank | 6.80% | 555 days Bank of Baroda | 6.75% | 555 days – BoB Golden Goal Deposit Scheme Central Bank of India | 6.70% | 444 days Source: Paisabazaar

Top 5 highest FD rates (private sector banks) Bank | Highest FD rate | Tenure DCB Bank | 7.50% | 24 to <25 months; 34 to <35 months; 60 to 61 months Bandhan Bank | 7.45% | 2 years to less than 3 years CSB Bank | 7.35% | 18 months Jammu & Kashmir Bank | 7.30% | 888 days SBM Bank India | 7.30% | Above 18 months to less than 2 years 3 days

Top 5 highest FD rates (small finance banks) Bank | Highest FD rate | Tenure Suryoday Small Finance Bank | 8.10% | 30 months Utkarsh Small Finance Bank | 8.10% | 666 days Equitas Small Finance Bank | 8.00% | 3 years 1 day (Maxima FD) Jana Small Finance Bank | 8.00% | Above 2 years to 3 years Shivalik Small Finance Bank | 8.00% | 23 months 1 day to 27 months Source: Paisabazaar

Deposit-credit growth

Since liquidity is an important factor for banks to run their businesses, they also monitor deposit growth and credit demand before raising FD interest rates.

As per the RBI data for the fortnight ended July 15, 2026, bank credit climbed by 17.7% (at Rs 217.3 lakh crore) year-on-year, while deposit growth rose just 12.7% (at Rs 262.9 lakh crore).

The credit-deposit ratio for the banking sector stood at 82.68% as on July 15. The same ratio as of the December 15, 2025, fortnight was 81.61%.

The gap between credit and deposit growth has widened in recent months, meaning banks are lending faster than they are mobilising deposits.

“When the gap persists, banks may need to attract more deposits to support future lending, and offering higher FD rates is one way to do that,” says Shetty.

However, other than the credit-deposit ratio, liquidity conditions and each bank's funding position also influence how quickly fixed deposit rates move.

10-year G-Sec yield is high

Banks also try to keep their fixed deposit rates higher than government securities to attract investors. Government securities are of various tenures, but the 10-year G-Securities yield is considered to be an important benchmark for many interest rates in India. For banks offering FDs, it also works as a competitive rate, and they want to keep their deposit rates higher than the 10-year G-Sec yield.

The 10-year G Sec yield as of July 31 stood at 6.833. It was 7% in early June and has been hovering around that mark since then. A high 10-year G-Sec rate also indicates that banks are likely to consider raising FD interest rates due to competitive pressure.

High interest rates for small savings schemes

Small savings schemes offered by banks and post offices also provide stiff competition for bank FDs. High small savings scheme interest rates mean banks also need to keep FD rates high to attract depositors.

Looking at the current small savings scheme rates, many of them have been offering over a 7% rate to their depositors with the Senior Citizen Small Savings Scheme (SCSS) and the Sukanya Samriddhi account offering the highest at 8.2% each. Since many retail investors also invest in small savings schemes, the government wants to keep interest rates high to benefit them. Despite many indicators suggesting so, the government didn’t decrease interest rates of small savings schemes since December 2024.

If banks want to raise more deposits, they will have to compete with interest rates from small savings schemes and they will be forced to consider raising the FD rates.

Post office small savings scheme interest rates Scheme | Interest Rate (%) | Tenure / Maturity Senior Citizen Savings Scheme (SCSS) | 8.20% | 5 years Sukanya Samriddhi Account (SSA) | 8.20% | 21 years (maximum) National Savings Certificate (NSC) | 7.70% | 5 years Kisan Vikas Patra (KVP) | 7.50% | 115 months Monthly Income Scheme (MIS) | 7.40% | 5 years Post Office Time Deposit (5-year) | 7.50% | 5 years Public Provident Fund (PPF) | 7.10% | 15 years Source: India Post

When can banks increase FD interest rates?

Raj Khosla, founder & managing director, MyMoneyMantra.com, says although there is no mandated timeframe, as soon as the RBI brings any policy change, banks typically revise their FD rates within a few days to 4-6 weeks. The exact speed of revision depends on several banking operational factors, says Khosla.

Shetty says some banks revise FD rates within a few days of an RBI policy change, while others may wait for several weeks depending on their funding requirements and liquidity position.

“Private sector and small finance banks often respond faster when they need deposits, whereas larger public sector banks may take longer if they already have sufficient liquidity,” explains Shetty.

Khosla says it has been noted that banks often adjust short and medium-term FD rates more quickly than long-term rates.

Rathi says banks may not increase rates on long-term deposits as they may think that the current inflationary forces are only temporary and they may not want to lock in higher interest rates for a long time.

Despite many indicators showing that banks may increase interest rates on certain FD tenures, lenders may still take some time to make such a move. They may wait for the RBI policy change, look at the credit-deposit ratio, internal liquidity conditions and a few other factors before going for a FD rate hike for select tenures.