Will FD investors get higher interest rates as Iran-US war continues and inflation shoots?

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

India’s retail inflation, measured by the consumer price index, for July 2026 is yet to be released, but looking at the data of past few months, inflation is on the rise. In June 2026, it was 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%, moving towards its upper tolerance band of 6%. As the RBI holds its Monetary Policy Committee (MPC) meeting with the decision on the repo rate scheduled for Friday (August 6, 2026), it may not increase the rate now.

However, a rate hike in the near future can’t be ruled out with inflation expected to rise amid Iran-US war. A rising inflation is also considered as an indicator of 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 increase, it’s not just high inflation that supports the idea, there a number of other factors, such as high credit demand, subdued deposit growth, rising yield on 10-year G-Securities (G-Sec) bond and competitive interest rates from small savings schemes among other factors that are also suggesting that banks may be compelled to consider interest rate hike if the trend continues.

While it can’t be said how long banks may take to increase FD rates, here we discuss a few points that indicate that a raise can’t be ruled out.

Rising retail inflation

How retail inflation has risen in the past few months can be gauged 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 due to Iran-US conflict and concerns around the monsoon kept inflationary pressures elevated.

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

For how long inflation may keep rising, Shetty says, it 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 comfortable zone of 2-6%, the RBI reacts by increasing the repo rate. However, it may not be possible in immediate future just looking at the inflation data of last two months.

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 increases 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 business, they also monitor deposit growth and credit demand before raising FD interest rates.

As per the RBI data for fortnight ended July 15, 2026, bank credit climbed by 17.7% (at Rs 217.3 lakh crore) year-on-year, while deposit growth slowed by 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 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 as 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 on small savings schemes

Small savings schemes offered by banks and post offices also produce 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 Senior Citizen Small Savings Scheme (SCSS) and Sukanya Samriddhi account offering the highest at a 8.2% each. Since many retail investors also invest in small savings schemes, the government also wants to keep interest rates high to benefit them. Despite many indicators suggesting, 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 small savings schemes interest rates and they will be compelled to consider increasing FD interest 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 so these banks 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.