The 75-basis point increase in the CRR to 5.75% didn't dampen investor sentiment much, as the central bank also raised its economic-growth outlook for the fiscal year ending March, to 7.5% from 6%, underscoring optimism that the South Asian economy is recovering at a brisk pace.

The status-quo on key policy rates essentially gives lenders some more time to shore up their credit portfolios by as much possible while the low-interest-rate regime lasts. For the uninitiated, interest rates in India have been at their lowest ever since the RBI, like other central banks, cut rates aggressively in the wake of the global financial crisis that intensified after October 2008.

The repurchase rate, or the RBI's overnight rate for lending to banks, is now at 4.75%, while the reverse-repurchase rate, or the borrowing rate, is at 3.25%. While the CRR hike is expected to absorb 360 billion rupees ($7.76 billion) of cash from the financial system, given that banks have been parking up to 800 billion rupees of surplus funds in the RBI's daily reverse-repo auctions, the move still leaves them ample liquidity to address borrowing requirements.

"We have got so much liquidity that (Friday's reserve ratio hike) does not impact us at all, in terms of there being an upward pressure on interest rates for our borrowers," O.P. Bhatt, chairman of State Bank of India, the country's largest lender by assets, said after the policy.

Credit growth for Indian banks, which dipped to as low as 9.5% in late October, has shown some signs of revival lately, rising 13.9% year-on-year in the two weeks ended Jan 15. But this still bears a sharp contrast to loan growth levels of around 25%-30% seen in the two to three years preceding the financial crisis.

The central bank's move Friday to cut its credit growth forecast for Indian banks to 16% from 18% for the fiscal year ending March is testimony to the fact that demand for loans has yet to reflect upon the economic revival.

However, RBI Gov. Duvvuri Subbarao said in his post-policy address that top bankers had expressed confidence that loan-growth prospects remain favorable.

Corporate lending is also picking up. Already, there have been some large sanctions that banks have made in January," says Vaibhav Agrawal, a vice president at Mumbai-based Angel Broking.

While banks' prospects will be tied closely to credit off-take, that is not the only factor likely to weigh on profitability over the next couple of quarters. Higher provisioning requirements and rising bad loans are already adding their share to banks' troubles.

A recent study by rating agency Crisil estimates that gross non-performing assets of the banking sector will touch near 5% of advances by 2011, up from 2.3% by end-March 2008.

Net bad loans for State Bank of India rose to 1.88% of its total lending portfolio as of Dec. 31, up from 1.39% a year earlier, and the bank has said it expects bad loans to continue rising for the next two quarters.

At the same time, lenders are witnessing a reversal in the trend of gains from treasury income, as bond yields have hardened on expectations of rate hikes. Such gains had boosted profit at most Indian banks in the first half of the current fiscal year. HDFC Bank /quotes/comstock/13*!hdb/quotes/nls/hdb  (HDB  118.30, +2.19, +1.89%) , India's second-largest private lender by assets after ICICI Bank, is one example, as it incurred a revaluation loss of 265 million rupees on investments in the October-December quarter, as bond yields firmed up.

Further, some lenders will see profits shrink as they set aside more funds to meet the higher provisioning requirements set by the RBI at its last policy review. The central bank had directed banks to have a provisioning coverage ratio of not less than 70% (versus 10% earlier) by the end of September 2010.

Yet even as uncertainties on interest rates, credit growth and profitability prevail, it won't be entirely surprising to see investors hunt for near-term bargains in bank stocks, which have traded under pressure ahead of the monetary policy announcement.

But a sustained rally need be supported by earnings growth, particularly growth that is led primarily by core banking operations -- with or without treasury gains.