Banks pay 5.67 per cent on new deposits while your EMI rises

By Strota Newsroom · 2026-10-10 · How Strota reports

On Wednesday, October 7, the Reserve Bank of India raised its policy repo rate by 25 basis points to 5.50 per cent, the first increase in that rate since February 2023. For a household the number is not abstract. It is the anchor that most floating home loans are priced off, and when it moves the lender reprices the loan. The other rate a household lives with, the one a bank pays on a fixed deposit, did not move with it. Through August banks were paying less on new deposits, and on Thursday the country's largest bank said that is not about to change.

The two rates are set by different questions. Since October 2019 the RBI has required new floating-rate retail loans to be tied to an external benchmark, and in practice that benchmark is the repo rate. RBI data put external benchmark linked loans at 68.2 per cent of banks' outstanding floating-rate rupee loans at the end of June 2026, with loans linked to the older marginal cost of funds benchmark at 29.6 per cent. A deposit rate answers a different question entirely: how much money the bank needs, and what it must pay to attract it.

The loan side had already been firming before the hike. RBI data reported by the Economic Times show the weighted average lending rate on fresh rupee loans rose to 8.61 per cent in August from 8.52 per cent in July, an increase of nine basis points. Measured from March, when banks raised deposit rates sharply, the average rate on fresh loans is up 21 basis points from 8.40 per cent.

Deposits went the other way. The weighted average rate on fresh rupee term deposits fell 18 basis points to 5.67 per cent in August from 5.85 per cent in July. In a single month the gap between what banks earn on new loans and what they pay on new deposits widened by 27 basis points.

The direction held across bank groups. Public sector banks paid 6.20 per cent on fresh term deposits, down 15 basis points, and private banks paid 5.82 per cent, down 14 basis points. Since March the average rate on fresh deposits has fallen 40 basis points from 6.07 per cent. The rate a borrower pays and the rate a saver earns have been moving apart rather than together.

That gap is a decision, and on Thursday the chairman of the State Bank of India explained it. C S Setty said he does not see a deposit rate increase for up to three months because the banking system holds more liquidity than it needs. A bank that already has the money has little reason to bid up the price of more of it.

The surplus has a source. Lenders raised nearly 133 billion dollars from the Indian diaspora through foreign currency non-resident deposits, and Setty said that money will be used up over the next two to three quarters. While it sits on the books it caps what banks must offer ordinary depositors. The Economic Times reported the same mechanism on the day of the policy decision, saying these inflows were keeping a lid on deposit rates.

Setty did leave the door open. He said that if credit growth stays at its present elevated pace, some banks may have to raise deposit rates to fund their advances. SBI expects to sustain loan growth of 14 to 15 per cent. Put plainly, the cap holds while money is plentiful and lending is not stretched.

For a saver the question is what a deposit earns against what prices do. On October 7 the RBI also published its Inflation Expectations Survey of Households. The median household expected prices to rise 9.9 per cent over the next three months, up 70 basis points from the July round, and 10.0 per cent over the next year, up 60 basis points from 9.4 per cent. Set beside a new deposit paying 5.67 per cent, that expectation implies a shrinking real return rather than a growing one.

The official inflation measure sits far below what households report. The RBI put consumer price inflation at 4.8 per cent in August and expects it to average 5.2 per cent through 2026-27, with the December quarter at 6.0 per cent. The distance between the survey number and the index number is part of the story, because the basket the statisticians price is not the basket a household shops.

Setty acknowledged the strain. He said depositors need to be compensated with some level of positive real interest rate in a scenario where inflation is inching up. On margins he said the RBI's shift to tightening should help banks expand net interest margins for up to three quarters, and that the street expects 75 basis points of increases across two or three moves while SBI's own house view is 0.50 per cent more. A wider margin is precisely what a gap between loan and deposit rates produces.

There is a version of the deposit story that pays more. Small finance banks and some private lenders compete on rate rather than on size, and Moneycontrol reported on October 9 that senior citizens can find fixed deposit rates as high as 8.50 per cent at some lenders. That trade is a higher rate for a smaller and less familiar institution, and it is the trade a household is really being asked to weigh.

What the record does not settle is how long the gap lasts. The RBI has said only that the stance is calibrated tightening and that rate cuts are off the table in the near term, without committing to how many increases follow. Whether deposits stay capped turns on two things the data do not yet decide: how quickly the foreign-currency deposits are drawn down, and whether credit growth holds at today's pace. What is already on the record is narrower and firmer. The rate that reprices a loan is up, and the rate that pays a saver is down.

More money stories

• Air India adds Rs 1,200 fuel surcharge as jet fuel hits Rs 137
• EPF ceiling rises to Rs 25,000. Employers must not cut pay
• Phone prices rose 16 per cent, so brands pay your EMI interest
• Gold fell 5.1% in September, its worst month since June
• Jio's $3.8 billion IPO lands in the longest slump since 2001
• 2.5 lakh festive jobs, and employers short of takers