Why banks are not raising FD rates despite RBI’s repo rate hike
Despite RBI's Oct 7 rate hike, a surge in foreign-currency deposits means banks have plenty of liquidity, and little reason to offer savers higher returns
When the Reserve Bank of India (RBI) increased its key interest rate on October 7, someone planning to renew a fixed deposit might reasonably have expected banks to pay more on savings.
But banks can choose when to change their deposit rates, and many have little reason to hurry. The explanation begins with a simple question: how badly do banks need more money?
Why does RBI raise repo rate?
A bank gets much of the money it lends from customers who keep their savings with it. It can also obtain short-term funds from other banks and, through a particular facility, from the RBI.
The repo rate is the interest rate charged when a bank borrows short-term funds from the RBI under an agreement to sell eligible government securities and buy them back later. The word “repo” is short for “repurchase agreement”. Economically, it works like a loan backed by government securities.
Suppose a bank needs ₹100 crore for a short period. It can use eligible government securities it holds to obtain funds from the RBI and agree to repurchase those securities later. The extra amount paid on repurchase is the financing cost, calculated using the repo rate. On October 7, the RBI increased this annual rate from 5.25 to 5.50 per cent, a rise of 0.25 percentage points, also called 25 basis points.
The RBI increases the repo rate when it wants to make borrowing more expensive across the economy, typically to restrain demand and inflation. The rate influences the wider financial system, including the interest charged on loans.
What are banks required to do?
But banks have several sources of money, so an increase in the repo rate does not oblige them to increase what they pay on fixed deposits by the same amount.
The RBI raised the repo rate from 5.25 to 5.50 per cent on October 7, because it expected inflation to remain elevated. Food and energy prices were rising, partly because of global disruptions, and the RBI was concerned that these increases could spread to other prices. Higher borrowing costs can temper spending and reduce some of that pressure.
The RBI forecast inflation averaging nearly 5.8 per cent over the next three quarters. Its October statement also noted that unusually abundant liquidity had accompanied efforts to attract overseas funding.
How do banks decide on rate?
Imagine two banks. One is short of money because customers are taking more loans than its existing deposits can support. To attract new depositors, it might offer a better fixed-deposit rate. The other bank already has plenty of funds. Raising deposit rates would mean paying more for money it does not urgently need. It may therefore keep rates unchanged.
This is the central reason higher RBI rates do not immediately mean higher savings returns. Banks compete for deposits when they need additional funding, and each bank weighs that need against how much extra interest it would have to pay.
A customer’s existing fixed deposit also usually continues at its agreed rate until maturity; a new rate generally applies when a fresh deposit is opened or an old one renewed.
Why are banks flush with funds?
In June 2026, the RBI introduced a special arrangement to encourage banks to mobilise foreign-currency deposits from Indians living abroad. These are known as Foreign Currency Non-Resident (Bank), or FCNR(B), deposits. The arrangement allowed eligible dollars raised by banks to be exchanged for rupees with the RBI on favourable terms, while reducing the cost of protecting against currency movements.
Normally, a bank accepting dollars and using the proceeds in India has to consider how it will obtain dollars again when the deposit matures. If the rupee has weakened, repayment can become costlier. The special RBI swap arrangement made that currency risk easier and less expensive for banks to manage. Banks consequently had a powerful incentive to seek deposits overseas.
The foreign-currency drive grew rapidly. A Finance Ministry announcement recorded $65.40 billion in FCNR(B) deposits mobilised under the scheme by August 21. Subsequent figures put cumulative FCNR(B) mobilisation at about $132.98 billion by the August closing date. These totals measure deposits mobilised through the special facility, which could include eligible renewals. They should therefore be distinguished from the net increase in outstanding foreign-currency deposits. The substantial funding access may have reduced some banks’ immediate need to attract Indian households with higher fixed-deposit rates.
The inflow was unevenly distributed. According to a Finance Ministry reply in Parliament, the combined FCNR(B) balances of banks covered by the table rose from $32.56 billion on June 5 to $60.55 billion on July 30, 2026, an increase of almost $28 billion. Private-sector banks contributed around $10.73 billion of that increase, public-sector banks $8.84 billion and foreign banks $8.37 billion. The table covers 46 named banks, with small finance and cooperative banks given as aggregate categories.
The differences across banks indicate how unevenly the early increase in foreign-currency deposits was distributed. They do not by themselves establish which banks held back domestic fixed-deposit rates.
The parliamentary comparison ends on July 30, while the wider mobilisation programme continued through August. Consequently, the bank-wise chart and the later scheme total refer to different periods and measures.
What changed after July?
The bank-wise figures presented in Parliament cover the period up to July 30, while the RBI-supported foreign-currency mobilisation continued through August. According to the Finance Ministry and subsequent RBI disclosures, cumulative FCNR(B) mobilisation had reached about $132.98 billion by the close of the special window on August 31. The August total provides the most recent picture, while the July table remains the basis for comparing individual banks.
Even before the October repo-rate increase, banks were charging more on fresh loans while paying less on fresh term deposits. The RBI’s August figures show that the average rate on newly sanctioned or disbursed rupee loans increased from 8.52 per cent in July to 8.61 per cent in August. Over the same period, the average interest paid on fresh term deposits fell from 5.85 to 5.67 per cent.
These are weighted averages: a larger loan or deposit counts more in the calculation than a smaller one. They describe what banks actually charged or paid on fresh business, rather than the rate every customer receives. The difference between the two averages grew from 2.67 percentage points in July to 2.94 in August. That one-month movement is worth examining, although it does not itself measure bank profits or establish a permanent trend.
Consider someone placing ₹10 lakh in a one-year fixed deposit. At 5.85 per cent, the simple annual interest would be ₹58,500 before tax. At 5.67 per cent, it would be ₹56,700, or ₹1,800 less. Actual returns depend on the bank’s quoted rate, tenure, compounding arrangements and tax. The comparison simply shows how a small interest-rate change affects savings income.
Inflation matters too. If prices rise quickly, the spending power of the interest earned shrinks. For retirees or families who rely on deposit interest for regular expenses, the return after inflation and tax may matter more than the headline rate.
But aren’t banks lending more?
Bank lending has continued to grow rapidly. According to RBI figures released on September 30, outstanding bank credit, excluding loans for food procurement, grew by 18.8 per cent in August 2026 compared with 10.2 per cent a year earlier. Lending to industries grew by 18.2 per cent, services by 24.3 per cent and individuals by 16.9 per cent. This indicates that banks were extending considerably more credit even as they appeared reluctant to raise interest rates on fixed deposits.
When will savers receive higher rates?
The situation can change as the extra funds are used, withdrawn or absorbed through the RBI’s liquidity-management operations. If lending continues to expand and banks need to replace maturing deposits, competition for savers’ money could intensify. Individual banks may then begin raising their offers, and some financial institutions have already adjusted deposit rates.
The RBI sets a key price for short-term funds, while each bank decides how much it needs to attract through deposits. The latest data show a period in which new borrowers paid slightly more and new depositors earned less. Whether the October rate increase eventually improves savings returns will depend heavily on when banks once again need to compete for customers’ money.
