The move by two of the country's top lenders - State Bank of India (SBI) and Punjab National Bank (PNB) - was a follow up of the Reserve Bank of India's appeal to banks last month to increase deposit rates.

While SBI will raise deposit rates by 25 to 75 basis points, leaving minimum rate of interest on loans unchanged at 7.50 per cent, PNB will raise base rate by 50 basis points to 8.50 percent and interest rates on term deposits by 25 to 50 basis points on selected maturity periods.

In August, SBI raised its benchmark lending rate by 50 basis points and deposit rates by up to 150 basis points.

PNB, meanwhile, has left the benchmark prime lending rate on loans taken prior to adoption of the base rate system - which stipulates the minimum lending rate below which the bank will not offer loans - the same at 11.75 per cent.

As high inflation had made real interest rates negative, India's central bank feared that it may lure people to alternative investments.

"One important consequence of negative real rates is that banks have seen a deceleration of deposit growth, as savers look for higher returns elsewhere. If bank credit is not to become a constraint to growth, real rates need to move in the direction of encouraging bank deposits," said RBI in its first mid-quarterly review.

India's banking system, which was sloshed in excess liquidity last year, was recently hit by large outflows due to cash withdrawals to make advance tax payments and rising credit demand, pushing it into the deficit mode.

Inflation based on wholesale prices had been close to 10 percent for the past few months as a price rise started with food articles has spilled over into the overall economy of the country. Most of India's major banks have been offering less than eight percent interest on deposits.

Separately, India's central bank has told the sector to put "conservative limits" on their investments in zero coupon bonds, including those by non-bank finance companies.

Banks should invest in zero coupon bonds only if the issuer builds up a sinking fund for the accrued interests and invests in liquid investments or securities such as government bonds, RBI said.

Investments in zero coupon bonds, if made on a large scale, could pose systemic risks since the credit risk on such bonds could go unrecognized until the maturity of the bonds, the central bank said.

Under zero coupon bonds, the issuer is not required to pay installments or interests until the maturity. The risk could be significantly higher especially for long-term zero coupon bonds, RBI said.