"We are talking to banks to understand what their perception is," RBI Governor D Subbarao said at a CII conference.

The interest rates should come down for India to become competitive, he said. Being a monetary authority, RBI cut policy rates, which should have been transmitted to lending rates by banks, he said.

"Policy rates have to be transmitted to lending rates by banks. We are looking into the transmission mechanism," Subbarao said. RBI studies the transmission mechanism even under normal circumstances, while in a crisis situation, the system gets clogged.

Meanwhile, Indian Banks' Association said banks could not lower their lending and deposit rates under the current scenario.

"There is no more headroom for banks to cut their prime lending rates (PLR) and deposit rates in the near future," IBA Chairman T S Narayanasami said.

On the chances of rate cuts by RBI, with the inflation falling to near-zero, to provide liquidity and cheaper funds to banks, the banker said these would not help.

"RBI repo cut will not have any effect as G-Sec (government securities) is firming up. Today, it (10-year treasury bond yield) crossed over 7 per cent," Narayanasami, who is Bank of India's [Get Quote] Chairman and Managing Director, said.

When asked to comment on RBI's observation, CII President and ICICI Bank [Get Quote] CEO and MD K V Kamath blamed high bond yields for not allowing the banks to effect rates cut.

"The challenge is bond rate. Bond rate has been behaving in a fashion which makes bankers uncomfortable," he said.

RBI has cut short-term lending rate (repo) by 5.5 per cent to 3.5 per cent and reverse repo rate by one per cent to five per cent since Lehman Brothers declared bankruptcy in September last.