A month after RBI’s rate hike, banks start raising deposit rates as liquidity shrinks, Bank of India the latest to move

Banks Raise Deposit Rates As Liquidity Tightens

Domestic banks have started to offer higher interest rates on deposits, following the central bank's decision to raise policy rates a month ago. Bank of India is the latest lender to revise its deposit rates upward across several maturity buckets. The bank has also introduced a special deposit option with a 500-day tenure. The move points to a broader trend of rising deposit costs within the banking system, driven by shrinking liquidity and growing demand for credit.

Liquidity in the banking system has fallen sharply from its peak in early September. This tightening has made it harder for banks to fund loan growth from existing resources. As credit demand picks up, banks are being forced to compete for deposits by offering better rates. The shift marks a change from the recent past, when ample liquidity kept deposit rates low.

Why This Matters For Businesses

For companies, a rise in deposit rates usually signals a higher cost of funds across the banking system. When banks pay more to depositors, they often pass on part of that cost to borrowers. This can translate into higher interest rates on working capital loans, term loans and other credit facilities. Businesses that rely on bank borrowing may see their finance costs increase, which can affect cash flows and project viability.

Higher deposit rates also influence where firms park their surplus cash. Treasury teams may find shorter-tenure deposits more attractive, and the special 500-day product could draw interest from those seeking a slightly longer lock-in. For tax and compliance teams, the change matters because interest income on deposits is taxable, and higher rates mean larger interest receipts to track and report.

What To Watch Next

Readers should monitor whether other banks follow Bank of India in revising deposit rates, and how quickly the transmission to lending rates takes place. The pace of credit growth relative to deposit growth will be a key in…