Some banks have started raising lending rates following the monetary tightening measures taken by Reserve Bank of India (RBI) to arrest depreciation of rupee.
Recently, youngest private sector lender YES Bank raised base lending rate by 25 basis points to 10.75 percent and fixed deposit rates by 25-50 basis points, effective August 1.
Similarly, the third-largest private sector lender Axis Bank hiked deposit rates by up to 400 basis points for select maturities. Other banks like Development Credit Bank, Ratnakar Bank have also raised deposit rates.
The RBI's monetary tightening measures forced banks that largely rely on wholesale and short-term funding are to raise interest rates, analysts feel.
These smaller private sector banks raised interest rate as they depend on short-term funds. A recent report of India Ratings & Research said the Indian banking system's dependence on short-term liabilities has grown to a point where refinancing pressures could hurt margins, unless rebalanced.
According to the agency, deposits maturing in less than one year formed over 45 percent of total deposits in 2013, up from 33 percent in 2002.
A significant part of these deposits had maturities less than six months and, for some banks, included a growing share of wholesale money market borrowings.