Public sector lenders led by State Bank of India [Get Quote] said on Monday that they will look at further interest rate cuts.SBI chairman O P Bhatt told reporters after a meeting with Finance Minister Pranab Mukherjee that the bank is considering cutting its prime lending rate for the second time in as many months.

SBI had cut PLR 75 basis points to 12.25 per cent on January 1 and has cut all new home loan rates to 8 per cent for a limited period with a clause to reset rates after one year.

"Since deposit rates have come down, there is a general expectation that interest rates will come down," Finance Secretary Arun Ramanathan said after public sector bank chiefs met Mukherjee.

Kolkata-based UCO Bank [Get Quote] Chairman S K Goel said the bank may cut lending and deposit rates 200 basis points, with a 100-basis-point reduction likely this month. The bank will also soon launch a scheme similar to SBI's.

United Bank of India said that it will cut its PLR 50 basis points shortly.

Punjab National Bank [Get Quote] and Bank of India said they will cut interest rates after inflation dips further and Bank of Baroda [Get Quote] and Bank of Maharashtra [Get Quote] said they will review the rates after a fortnight. Canara Bank [Get Quote] also sees lending rates coming down for all sectors.

Mukherjee said the government will focus on boosting domestic demand. "In view of contracting global demand, we have to focus on domestic demand by primarily stimulating demand in the rural areas and highly labour-intensive sectors," he said.

The banks were advised to enhance credit to productive sectors like infrastructure, small and medium industries and textiles, among others.

In a bid to boost the economy, the Reserve Bank of India has taken a series of measures since September last year including cuts in the cash reserve ratio and the repo and reverse repo rates to inject liquidity into the system and signal a soft interest rate regime.

But last week RBI said banks could reduce rates further. Since November, public sector lenders have reduced lending rates up to 200 basis points, while private banks have lowered rates 50 basis points. In contrast, deposit rates have been reduced up to 300 basis points.

Bankers have been reluctant to push lending rates further as they claim that the cost of deposits has not come down significantly. A further reduction in deposit costs will result in investors shifting to small savings schemes such as post office deposits and public provident fund, which offer 8 per cent returns, they said.