As the credit demand picks up, bankers expect a consequent hardening of interest rates in time to come.

O.P. Bhatt, chairman, Sate Bank of India, said, "interest rates could harden in six months after falling since last October as demand for credit picks up."

The statement was made following the meeting between RBI Governor, D. Subbarao and banking chiefs, a day after the announcement of Union Budget by finance minister Pranab Mukerjee.

Bhatt indicated that the meeting discussions revolved the "liquidity overhang" in the system and management of government borrowing. Banks have also urged the regulator to extend loan restructuring scheme till December this year.

The quarterly monetary policy review meeting is scheduled on July 28.

Explaining the fluctuating behavior, Bhatt said, "six months down the line with credit rising and all the borrowing taking place, rates will either stabilise or even harden. There are lot of signs available in the economy that business activity is increasing across multiple sectors. But it is still not showing up in bank lending. We believe that with time lag it is going to happen."

The country's largest lender, SBI recently reduced its lending rate by 50 basis points to 11.75 percent p.a.. With this the benchmark lending rate of the bank has cumulatively reduced by 200 basis points since November.

Foreseeing the economic downtrend, the Reserve Bank of India (RBI) reduced PLR by 425 basis points in October last year, asking banks to lower the PLR accordingly. However, since then, the state-run banks have lowered their lending rates by a mere of 150-200 basis points.