During his five-year stint as Reserve Bank of India (RBI) governor, Yaga Venugopal Reddy has announced several frontal attacks on inflation as part of his credit policy pronouncements. But his latest one, on July 29, was by far the toughest one for the banking industry.

This time, while hiking the cash reserve ratio by (CRR ) by 25 basis points and the repo rate by 50 basis points, he was firm that the banks have to fall in line in bringing their business targets within the RBI?s target to drastically reduce the double-digit inflation number.

While the policy actions would aim to bring down the current ?intolerable? level of inflation to a tolerable level of below 5% as soon as possible and around 3% over the medium-term, at this juncture a realistic policy endeavour would be to bring down inflation from the current level of about 11-12% to a level close to 7% by March 31, 2009, he said.

?While there are early signs of some moderation in money supply and deposit growth, they continue to expand above the indicative projections, warranting continuous vigilance and appropriate and timely policy responses,? explained Reddy.

Reddy?s cautioning that the evolving environment of heightened uncertainty in global markets (over which RBI has no control) and the dangers of potential spillovers to domestic markets were interpreted by bankers as an indication that more stringent monetary measures may be forthcoming from the central bank.

The RBI?s wish-list for banks had many items:

It is necessary to moderate monetary expansion and plan for a rate of money supply growth in the range of around 17% in 2008-09 in consonance with the outlook on growth and inflation so as to ensure macroeconomic and financial stability in the period ahead, said RBI on its target for banks.

Moreover, consistent with the projection of money supply, the growth in aggregate deposits in 2008-09 is now placed at around 17.5% or around Rs 6,00,000 crore. The growth of non-food credit, including investments in bonds/debentures/shares of public sector undertakings and private corporate sector and CP, is placed at around 20% in 2008-09

Banks, this time, have understood that RBI means business, and have swung into action to pare their growth targets for the year. Despite the continuation of the tight monetary policy stance, the credit growth in the banking industry at 25% till July-end has remained much above RBI?s target. This effectively means banks have to now restructure their earlier budgeted growth drastically. For most of the banks which were not happy with their results for the Q1 2009, it is now time for further mid course corrections.

Bank of India is looking at moderating its credit growth to 20-22% this fiscal from above 30% a year ago. The bank is stressing on more qualitative loans by discouraging the negative sectors with higher delinquencies, said a senior official of the bank.

MD Mallya, chairman and managing director, BoB, says his bank has already put due diligence in place in some of the retail sectors which were given priority in the bank?s 19 retail ?loan factories? across the country.

MV Nair, CMD of Union Bank of India says there are two views how the high interest regime can check credit growth.

?The rise in the interest rates may result in the increase of delinquency, which can be handled only through monitoring of the entire loan mechanism. We as bankers have to look at maintaining the credit quality,?? he says.

On Andhra Bank?s action plan, the newly-appointed CMD RS Reddy says: ?We are revising the rates upwards on our individual products. Also, we want to increase the rates on those segments where the delinquency was higher. We are planning to charge higher interest rates in areas like mortgage.??

The bankers are now confident that RBI?s policy would be effective and things would be brought under control and expect industry to do its bit.

Business sentiment polled by surveys reflects a more broad-based moderation in some cases, while others expected higher investments to take place. One survey reported slower growth expectations for output, foreign trade and pre-tax profits for the next six months. However, a majority of the respondent firms propose to increase investments during the current year. All this may now change.

Another survey reported a significant decline in business optimism due to increase in input costs, global economic instability and hardening of interest rates, but nearly half the respondents intend to increase their manpower. In yet another survey, nearly two-thirds of the respondents expected an increase in order books, exports and investment and nearly half expected to increase employment during April-September 2008.

With RBI slamming the brakes on credit expansion, how far these plans will fructify is now anybody?s guess. As the governor made clear on July 29, bringing down the prices of daal chawal is clearly his top priority. Profits for banks can wait.