Though he refrained from any rate cut, Reddy goaded Indian banks to pare their lending and deposit rates, saying they are highly profitable and their net interest margin, or the gap between the interest they pay on deposits and earn on loans, has not been affected.

M.B.N. Rao, chairman of Canara Bank, and also head of the Indian Banks' Association, said his bank would take a call on lending rates soon, but not too many bankers share Rao's view. Chanda Kochchar, joint managing director of ICICI Bank Ltd, India's largest private sector lender, said banks would watch the liquidity situation for now and take a call on lending and deposit rates in the new fiscal beginning April.

Reddy's rather hawkish tone pulled down bond prices and the yield on the benchmark 10-year bond, which dropped to 7.35% last week after the Fed's 75 basis points cut, rose to 7.52% on Tuesday. The yield and prices of bonds move in opposite directions.

Alok Prasad, a bond dealer with Securities Trading Corp.

of India Ltd, a non-banking finance firm, said the bond yield would not come down even if the US Fed cut its rate again this week as RBI "is not following the Fed move".

Most bank stocks fell on Tuesday and public sector banks were more affected than the private ones. Shares of Bank of Baroda, Bank of India, Indian Overseas Bank and Oriental Bank of Commerce lost more than 5% each and those of State Bank of India, the nation's largest lender, fell 3.58% to close at Rs2,225.10. The Bombay Stock Exchange's banking industry index, Bankex, lost 3.48% even as the benchmark index Sensex, lost only 0.34%. Among private lenders, shares of ICICI Bank lost 6.37% and those of HDFC Bank Ltd 3.36%.

"A rate cut would have triggered a rally on the bond market and banks would have made money trading bonds.

That has not happened," said an analyst with a foreign brokerage.

Sandesh Kirkire, chief executive officer, Kotak Mahindra Mutual Fund, which manages more than Rs20,000 crore worth of assets, believes the policy document actually indicates a moderation in RBI's stance and is "largely dovish to neutral". However, not too many people share his views. A senior executive with an international brokerage, who did not wish to be identified, said: "At best, one can call it a neutral policy and there is not even an iota of bullishness in the policy." A. Prasanna, vicepresident of ICICI Securities Primary Dealership Ltd, said RBI might cut the policy rate in April when it announces its annual monetary policy if inflation remains under control.

However, a Lehman Brothers report, released immediately after the policy, said the firm expected RBI to keep its rates unchanged but hike CRR by 100 basis points by March 2009.

"Based on our current house view that the US Fed cuts rates by a further 100 basis points to 2.50% by the year-end and successfully averts a recession, we expect India to attract massive capital inflows, flooding the economy with liquidity, adding inflationary pressures and forcing RBI to hike the CRR by 100 basis points by March 2009. In this base case, we expect RBI to keep interest rates unchanged," it said.