Banks that had cut their prime lending rates early this year on cues from the government are reviewing the decision due to a sharp rise in inflation.

A host of public sector banks had cut interest rates in the earlier part of this year following an advisory from Finance Minister P Chidambaram in January. Private and smaller state-owned banks, however, did not cut rates.

When contacted, State Bank of India [Get Quote] Chairman O P Bhatt said the bank might have to reverse the rate cut as "we will be out of sync with the market and hurt ourselves".

He said the bank is looking at the monetary policy and no firm decision has been taken.

SBI had cut its benchmark prime lending rate by 50 basis points to 12.25 per cent. According to estimates, the decision is expected to affect its bottom line by nearly Rs 100 crore.

Bhatt, however, defended SBI's decision to cut PLR as India's largest bank cannot get away from its social responsibility. "Profit alone can't always be our motive. However, we have to fine-tune certain decisions based on exigencies like high inflation rates," he said.

Apart from reducing rates in January, Bhatt said that by staying away from garnering bulk deposits during February and March, SBI had ensured that the cost of credit for the banking system remained low and lending rates did not rise.

Added Punjab National Bank [Get Quote] Chairman and Managing Director KC Chakrabarty, "Definitely rates will harden. It's a matter of time. We are waiting for signals." Only last month, PNB reduced its BPLR from 13 per cent to 12.50 per cent.

Bank of India, which had also pared rates by 50 basis points, said the signals point to hardening of rates, but a final decision will be taken after the monetary policy on April 29.

"The bank will have to assess the impact of any policy measure like a hike in the cash reserve ratio on the profit and loss account and then decide," said BoI Executive Director K Kamath, though he did not discuss the extent to which rates may be hiked.

IDBI Chairman and Managing Director Yogesh Agarwal had told Business Standard that banks, which had reduced rates earlier this year, might have to review their decision due to higher inflation. IDBI decided to put on hold its decision to pare its BPLR from April.

IDBI Chief Financial Officer RK Bansal today said: "A cut in lending rates may not be prudent since the Reserve Bank may raise the Cash Reserve Ratio in its credit policy if inflation remains high."

With inflation reaching a three-and-a-half year high, interest rates are expected to harden. RBI is expected to announce some measures in the credit policy scheduled for April, though there is a slowdown in credit demand.

During 2007-08, bank credit grew 21.6 per cent compared with 28.1 per cent during the corresponding period in the previous year. Non-food credit was 22.3 per cent higher at the end of March 28 this year, against 28.5 per cent during 2006-07.