I have seen that Indian Overseas Bank has increased its fixed deposit interest rates. Thee is some upward revision.
But when banks raise their deposit interest rates, there may be some increase for loan rates also.
Banks change their interest rates for deposit as well as loans based on certain conditions.
1. Government's or RBI 's instruction and policy guidelines.
When the govt wants more credit to flow , then they ask banks to reduce the loan interest rates. Similarly when govt/RBI wants to suck the extra liquidity, then they ask banks to keep more finds with Govt/RBI and banks also give more interest to deposits to get more deposits.
2. Depending on the demand for deposit or loan.
When banks plan huge credit expansion,they have to mobilise more deposits. Hence they offer more interests to deposits. However when the revers occurs,that is, their credit expansion is maximum and they do not need fresh funds, they reduce the deposit interest rates.
3. Matching the loan and funds.
Banks have to match the their funds and loans as per the period. For example, if the bank wants to give 100 crores of loans for a period of 5 years then they should get deposit of 100 crores which will mature after 5 years. So the banks will adjust the interest rates to certain periods as per their business needs.
4. Adjusting the spreads
Banks are mandated by Govt/RBI to keep the spread- gap between loan interest rate and deposit interest rate- to a certain percentage pints. for example if the spread has to be maintained at say 5 percent points, and if the maximum interest rate for loan is 12 percent then the maximum deposit rate can be only 8 per cent. That means when they increase the deposit rates they have to increase the loan rates also. This may meet with resistance.
Reason for the present increase in FD rates , if any:
Banks had been asked to declare their NPAs honestly to the maximum extent and 'clean' their balance sheets for the just ended FY. So that would have affected the profits of many banks, due to the mandatory 'provisions'.
However for further profits, banks have to lend further loans. So they need more deposit. So naturally they will increase the deposit interest rates.
But when there comes recovery and return from the existing NPAs, the banks will gain both by way of profits and funds flow. At that time the banks may again review the deposit rats and may reduce the rates. I also guess, the government may be planning huge credit flow to the small sectors and individuals , especially a the elections are coming. So the banks may be pressed to disburse maximum loans to the small scale, and business sectors. It may be foreseeing this the banks may go for deposit by increasing deposit rates.