Will fixed deposit interest rates go up in October as inflation rises?

After the government revealed that Consumer Price Index (CPI) inflation for August 2026 increased to 4.8% year-on-year (YoY), HSBC Global Investment Research, in its forecast, expects the Reserve Bank of India (RBI) to hike policy rates (repo rate) by 25bps twice, one each in its October and December Monetary Policy Committee (MPC) meetings, taking the overall rate to 5.75% from 5.25%.

However, a 4.8% inflation rate is still far below the RBI’s upper tolerance limit of 6%, a point that may trigger the RBI to increase the repo rate; rising inflation for the last many months provides a higher probability of the RBI increasing the repo rate.

Can continuously rising inflation and a high repo rate compel banks to increase their fixed deposit (FD) interest rates? What do other key indicators, such as the high credit-growth ratio, high 10-year G-Securities yield, and high interest rates of small savings schemes suggest about the possibility of high FD rates in the near future?


Rising inflation’s relation with FD interest rates

Inflation has been rising since October 2025, when it was at a low of 0.25. In the year 2026, it rose from 2.74% in January to 4.82% in August. The US-Iran conflict, rising crude prices and increasing transport costs suggest that inflation may continue rising for the next few months. Once it moves closer to the 6% upper tolerance limit, the RBI may react by increasing the rate. If that happens, banks may find an opportunity to increase interest rates.

Inflation rate since December 2025

Month	CPI inflation (%)
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%
Jul-26	4.44%
Aug-26	4.82%

Adhil Shetty, CEO, Bankbazaar, told ET Wealth Online that banks also consider the RBI’s interest-rate stance, liquidity in the financial system and demand for loans before determining FD rates.

“If inflation stays elevated, it could put upward pressure on interest rates. In such a situation, deposit rates may rise to attract funds, particularly when loan demand is strong, and banks need more deposits. However, if deposit growth is adequate and liquidity remains comfortable, there may be little need to raise FD rates even if inflation rises. The outlook will therefore depend on how inflation affects RBI policy and interest rates, along with funding requirements across the financial system."

Thomas Stephen, director & head preferred, Anand Rathi Shares and Stock Brokers, told ET Wealth Online that overall, the combination of persistent inflation, elevated food and oil prices, changing rate expectations and banks’ own funding requirements suggests that the probability of higher FD rates is increasing.

"However, a sustained move higher would depend on whether these pressures persist and how the RBI responds," says Stephen.

Deposit-credit growth is high

For banks, liquidity is a key factor for running their business. Before deciding on FD rates, banks also monitor deposit growth and credit demand.

As per the RBI data for July 31, 2026, banks’ credit grew by 19.3% (at Rs 220.78 lakh crore) year-on-year, while deposit growth was 15.4% (at Rs 269.41 crore).

The credit-deposit ratio for the banking sector stood at 81.96% as on July 31.

The credit growth on March 31, 2026, was 15.9%, while the deposit growth on the same date was 13.5%.

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

When such a gap persists for a long time, banks may need to attract more deposits to support future lending, and hence, they may offer higher FD rates to attract that.

While the credit-deposit ratio is a broader parameter, liquidity conditions and each bank’s funding position also influence how quickly FD rates move.

High 10-year G-Sec yield provides stiff competition to FD rates

Bank deposit rates compete with government securities (G-Secs) rates. So, banks need to keep FD rates higher than G-Secs to attract more deposits. G-Secs are of various tenures and may offer different rates, but the 10-year G-Sec is considered a prominent benchmark for various interest rates in India.

The three-month average interest rate for the 10-year G-Sec is 6.890%, with 7.142% being the highest and 6.675% being the lowest. In contrast, many public sector banks are offering their highest interest rates below 7%. The highest 5-year FD interest rate among prominent public sector banks is 6.35% at Punjab National Bank.

A high G-Sec yield can create pressure on banks to increase FD rates to attract deposits.

Highest 5-year FD interest rates from public sector, private sector and small finance banks

Public sector banks	Private sector banks	Small finance banks
Punjab National Bank (6.35%)	DCB Bank (7.50%)	Suryoday Small Finance Bank (8.25%)
Bank of Baroda (6.30%)	IDFC FIRST Bank (6.75%)	Jana Small Finance Bank (7.77%)
Canara Bank (6.25%)	YES Bank (6.75%)	Ujjivan Small Finance Bank (7.20%)
Indian Overseas Bank (6.10%)	RBL Bank (6.70%)	Equitas Small Finance Bank (7.00%)
State Bank of India (6.05%)	Tamilnad Mercantile Bank (6.70%)	slice Small Finance Bank (7.00%)

FD Rate source: Paisabazaar

High interest rates of small savings schemes

Small savings schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS) provide an opportunity to crores of Indians to invest their money. At the same time, their rates are in intense competition with FD rates of banks.

At present, many small savings schemes are offering interest rates of more than 7%. Schemes like the SCSS and Sukanya Samriddhi Scheme (SCSS) offer an 8.2% rate each. The government has not decreased small savings scheme rates for nearly two years, despite many indicators suggesting the possibility of rate hikes.

If banks keep their FD rates low for a long time, more investors may prefer investing in small savings schemes to bank deposits.

In order to avoid that possibility, banks may also increase FD rates.

Post Office small savings interest rates: July–September 2026

Small savings scheme	Interest rate	Interest/payment frequency
Post Office Savings Account	4.00%	Annual
National Savings Recurring Deposit (5-year RD)	6.70%	Quarterly compounded
National Savings Time Deposit – 1 year	6.90%	Quarterly compounded
National Savings Time Deposit – 2 years	7.00%	Quarterly compounded
National Savings Time Deposit – 3 years	7.10%	Quarterly compounded
National Savings Time Deposit – 5 years	7.50%	Quarterly compounded
National Savings Monthly Income Account (MIS)	7.40%	Monthly
Senior Citizens Savings Scheme (SCSS)	8.20%	Quarterly
Public Provident Fund (PPF)	7.10%	Annual compounding
National Savings Certificate (NSC)	7.70%	Annual compounding
Kisan Vikas Patra (KVP)	7.50%	Compounded annually
Sukanya Samriddhi Account (SSA)	8.20%	Annual compounding

Can banks increase FD interest rates in October?

Stephen says the RBI’s October 5–7 MPC meeting will be important.

“If inflation remains elevated and prompts the central bank to consider a rate hike or adopt a more hawkish stance, banks could subsequently raise FD rates to strengthen deposit mobilisation.”

But Stephen also says that if the RBI continues to view the recent inflation spike as temporary and keeps the policy rate unchanged in October, FD rates are likely to remain broadly stable.

“Any meaningful increase could then be deferred to December 2026 or even into 2027, depending on the evolution of inflation, liquidity and credit demand,” says Stephen.