Depositors locking in high rates push up FD share

ET Intelligence Group: The share of fixed deposits (FD) in total bank deposits rose to a two-year high of 62% in the September 2025 quarter from 57% in the March 2023 quarter, showed the Reserve Bank of India (RBI) data. Depositors moved money out of low-yield savings accounts to take advantage of better FD rates before the RBI’s stance to gradually reduce the repo rate could affect the FD rates significantly, according to bankers. The share of savings account deposits fell to 29% from 33% during the period, raising funding costs of banks and putting pressure on their interest margins.

Private banks gained ground in the race to attract deposits, lifting their FD share to 36% from 33% in June 2023, while the share of public sector banks slipped to 58% from 61% by similar comparison.

“Term deposits have grown sharply in the June and September quarter this year because customers are now far more yield-sensitive and digitally empowered to lock in higher rates in a tight-liquidity environment,” Virat Diwanji, national head-consumer banking, Federal Bank told ET. “This was also the period where interest rate cycle was on a downward trend so customers wanted to lock in their surplus funds at higher rates,” he said, adding that the private sector banks moved faster on pricing and digital acquisition of deposits thereby capturing a larger share.

Banks increased FD rates after grappling with a prolonged liquidity crunch through most of 2024 and the first few months of 2025 thereby fuelling the flight of depositors away from savings accounts. With credit outpacing deposits, lenders rolled out special rates and special schemes making FDs more appealing than savings accounts. In addition, a surge in systematic investment plans (SIPs) led by a stock market rally pulled funds away from bank savings accounts into mutual funds and direct stocks, further accelerating the fall in savings deposit share.

“In the chase for better returns, depositors moved money out of low-yield savings accounts into higher-paying fixed deposits. At the same time, a sizeable portion of household savings migrated out of the banking system into mutual funds and equities,” said Salee Nair, MD and CEO of Tamilnad Mercantile Bank (TMB).

The drop in low-cost saving deposits posed a problem for banks, forcing them to raise funds at higher costs. Bankers say that even after the 100 basis point rate cut by the RBI since February 2025, fixed deposit rates have not fallen in tandem due to high competition for deposits. “Banks are reluctant to sharply reduce FD rates because they continue to prioritise deposit mobilisation to support credit growth and maintain comfortable liquidity buffers,” said Nair.

As interest rates plateau, term deposit growth will remain healthy but the pace will moderate, according to Diwanji.