Banks are expecting more monetary tightening measures from the Reserve Bank of India as part of a joint inflation combating initiative with the Centre.

Most bankers said that they will wait for the central bank's next move before effecting a rate hike. HDFC Bank [Get Quote], the country's second largest private player, has already factored in a possible increase in cash reserve ratio while raising its prime lending rate by 25 basis points to 15.25 per cent.

"This revision captures the recent hike in repo rate and expected hike in CRR," a senior HDFC Bank executive said. The bank's Managing Director Aditya Puri added that the net interest margins are under pressure and the cost of funds is high.

"There is indication of a slowdown in retail credit flow," Puri said.

Earlier this week, Yes Bank [Get Quote] had raised PLR by 50 basis points, while last week Jammu & Kashmir Bank had increased its PLR by 100 basis points to 14 per cent. HDFC Bank also announced an increase in deposit rates by 25 basis points.

With inflation touching 11.05 per cent in the first week of June, bankers are expecting a 25-50 basis point rise in CRR, or the proportion of deposits kept with the central bank.

If inflation continues to stay in double-digit zone, the central bank may raise the repo rate, or the rate at which it lends to banks, once again, said Bank of India Chairman & Managing Director T S Narayanasami.

With inflation is continuously moving up, RBI has increased the CRR by 75 basis points this year, while the repo rate was increased by 25 basis points last week. On their part, the two biggest lenders in the country, State Bank of India [Get Quote] and ICICI Bank [Get Quote], said they will adopt a wait-and-watch strategy.

HDFC Vice Chairman and Managing Director Keki Mistry said that the largest home mortgage player in the country will decide on its interest rate strategy in a couple of weeks.

"There is a possibility of a CRR hike by 25 basis points. It's (inflation) a supply-driven problem. If the cost of funding increases, then we may increase rates. We will wait for a couple of weeks and then take a call," he said, adding that an increase in home loan rates by 50 basis points may not affect borrowers significantly.

"We will review the trends before taking a decision on rate revision," said ICICI Bank Executive Director V Vaidyanathan.

While Vaidyanathan added that the fiscal steps initiated by the government will start showing results over the next few months, UCO Bank [Get Quote] Chairman and Managing Director S K Goyel said that RBI may raise the CRR in the monetary policy review next month instead of taking steps immediately.

"There is upward pressure in interest rates and the increase in inflation is a temporary blip. This will not impact corporate borrowings," said IDBI Chairman and Managing Director Yogesh Agarwal.

On Friday, the BSE Bankex fell nearly 3 per cent and an analyst at Angel Broking said that bank shares will come under pressure. BoI shares saw the steepest fall of 7.36 per cent. The Bankex fell 8.9 per cent this week.

• Inflation, the silent killer!