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

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

Bank of India (BoI) is the latest lender to raise its deposit rates which, unlike external benchmark-linked lending rates, would take time to head north despite the early-October start to the hardening cycle by the Reserve Bank of India (RBI). On Monday, BoI increased its deposit rates for maturities between one and below three years by 10 to 35 basis points, becoming the second bank in the current cycle to hike rates.

One basis point is 0.01 percentage point.

After the hike, one year deposit less than ₹3 crore will earn 6.60% interest, up from 6.50%, while one year to less than two years will earn 6.70% interest, up from 6.50%. The bank has also introduced a special 500-day deposit, which will earn 6.85%, from 6.50% earlier.

"The hike in deposit rates reflects higher cost of deposits in the system. Bulk deposit rates have gone up and the bank also has to adjust the liability profile in line with the higher interest rates," said a senior BoI executive. "On the whole, liquidity in the banking system has tightened as the advantages from the unprecedented inflows from the FCNR (B) scheme have started waning."

Banking system liquidity has come off from a peak of more than ₹11 lakh crore early September to about ₹1.96 lakh crore currently as a result of bond sales and variable reverse repo auctions. The tightening in liquidity can be noticed in the higher rates banks are paying in the certificate of deposit (CD) market, which have increased to over 8% for the first time since early 2023, reflecting tighter systemic liquidity. Indian Bank had already hiked rates in select tenures late last month on two special term deposits of 555 days and 777 days.