The problem was with /etc/sysconfig/console.
I had created it with this addition
The following example illustrates keymap autoconversion from ISO-8859-15 to UTF-8 and enabling dead keys in Unicode mode:
cat > /etc/sysconfig/console << "EOF"
# Begin /etc/sysconfig/console
FONT="LatArCyrHeb-16 -m 8859-15"
# End /etc/sysconfig/console
As it was mentioned somewhere there might be issues with UTF8, i thought the above will be helpful. Looks like it set default keyboard to de-latin1 format.
I have commented all that, and its working fine now. (/etc/profile is as it was)