Located on the outskirts of the city, the enormous Agastya Lake lies below the cave temples. It is said to have been formed in the 5th century and many believe that its water has curative properties. The lake is considered holy and devotees take a dip in its waters to wash away their sins. The cave temples lie on the south-west side of the lake, with the popular Bhoothanatha Temple stationed on its eastern bank. The last cave of the temples faces the serene vistas of the lake. One can sit on the rocks of the temple and enjoy a beautiful view of the sun setting beyond the lake.

Legend has it that when the Chalukyas ruled the region around Badami, the capital of their kingdom, Vatapi, was carved out of stone and spread around the ravine of the Agastya Lake. It is said that the lake has been named after sage Agastya of the epic Ramayana.