UPDATE 1-State Bank of India sees rates rising in 6 months

* Sees interest rates rising by 25-100 basis points in 6 mths

* Hopes to improve net interest margin to 2.5 pct

(Adds detail)

KOLKATA, INDIA, July 13 (Reuters) - State Bank of India (SBI.BO), the country's top lender, sees interest rates rising by up to 100 basis points in six months if cash conditions tighten, its chairman said on Monday.

Banks are now flush with cash but this could come under pressure after the government last week announced record borrowings of 4.5 trillion rupees ($92 billion) in 2009/10 and as economic activity picks up in the coming months.

"There is a possibility of interest rates going up by 25 to 100 basis points, if liquidity is not managed well when the busy season picks up," O.P. Bhatt told reporters on the sidelines of a banking seminar.

He was referring to the second half of the fiscal year that began in April.

Commercial bank lending rates have fallen by about 200 basis points since last October after the central bank slashed its main lending rate by 425 basis points to lift a slowing economy.

"I don't see interest rate going down further," Bhatt said. "Inflation is going up, government borrowing will increase and liquidity in the system would come down, so in the next 3-6 months we could see interest rate firming up again."

Indian bank loan growth INLOAN=ECI slowed to around 15 percent in June from about 30 percent in 2007/08, but is expected to pick up in the coming months as economic activity revives.

State Bank, which along with its associates controls a quarter of Indian bank loans and deposits, has not yet seen demand for loans picking up despite low interest rates.

The bank, which offers home loans for as low as 8 percent and clutch of other advances for small and medium firms and auto loans well below its benchmark rate, has seen only marginal loan growth in the June quarter from January-March, Bhatt said.

State Bank aims to improve its net interest margin, a key measure of efficiency, to 2.5 percent from 2.3 percent in March quarter as declining interest rates hurt, he said.

Shares in State Bank, which has a market value of $20.2 billion, ended 0.2 percent higher at 1,546.10 rupees in a weak Mumbai market. The stock has risen a fifth so far in 2009, compared with 39 percent gain for the main index.

(Reporting by Niladri Bhattacharya; Editing by Ranjit Gangadharan)

($1 = 49.2 rupees)

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