According to Rupya.com, DBS Bank, a Singapore based bank pays 8.5% p.a, the highest interest rate on fixed deposits (2 year maturities)  in India followed closely by YES Bank, which pays 8.25% p.a. Public sector banks such as State Bank of India and Andhra Bank pay 7.25%  p.a . It is also interesting to note that most banks pay higher interest rates to senior citizens  ( 65+ years of age).

Banks pay interest to depositors as incentive for them to deposit their money with the bank. This interest rate depends on several factors such as expected inflation, credit risk, liquidity risk etc. Generally speaking, the interest rates paid by banks on fixed deposits with similar terms  are supposed to reflect of the credit risk that the depositors take on by depositing money with the banks. Credit risk is the risk that arises from the possibility that the bank may default on the interest payment/principal payment. The higher the probability of default, the higher the credit risk. The higher the credit risk, the more the interest the bank has to pay in order to get depositors to deposit money with the bank.

Technically speaking, only bonds issued by the Reserve Bank of India(equivalent to the US Federal Reserve) are credit risk-free. However, deposits with public sector banks are considered credit risk free for all practical purposes(very low credit risk) . Public sector banks include banks like State Bank of India, State Bank of Hyderabad, Andhra Bank etc.

Click here to see the original article and the table of interest rates.

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