The Reserve Bank of India on Friday prodded banks to reduce interest rates after the monetary policy measures announced by it over the last five months have failed to result in lower cost of funds for the economy.

Bankers present at the meeting said that the central bank is particularly keen that the private sector lenders make loans cheaper as they have so far pared interest rates by only 50 basis points, while their public sector counterparts have reduced rates by up to 200 basis points. Foreign banks have been even more reluctant in cutting rates.

ICICI Bank [Get Quote] Managing Director and CEO K V Kamath, who was among those who attended the meeting convened by RBI Governor D Subbarao, however, said that his bank was watching the developments in the bond markets.

"It was a general discussion with exchange of views regarding the performance of economy. RBI wanted to assess how banks are coping with falling interest rates," Kamath said after the meeting.

But, sources present at the meeting said that private and foreign banks conveyed to RBI that they were so far reluctant to cut rates, particularly those on the deposit side, as customers were shifting to public sector players, where they felt their money was safer. However, this trend has changed in recent days and a review of rates is expected in the coming weeks, bank representatives are said to have told RBI.

Public sector bankers said they are not in a position to lower deposit, and consequently lending rates immediately. "We will take a call in a month or so. Whenever we reduce the deposit rates, lending rates will be brought down proportionately," a public sector bank chief said.

On their part, public sector banks have assured RBI that they would initiate whatever steps are needed to increase credit flow.

Over the last five months, RBI has reduced the cash reserve ratio by 400 basis points to inject Rs 1,60,000 crore (Rs 1,600 billion) liquidity. The repo rate has been lowered by 350 basis points to 5.5 per cent and the reverse repo rate has been cut by 200 basis points to 4 per cent.

In addition, bankers told the RBI brass that there was ample liquidity in system as was seen in the call money rate with the last trade at 4.05 per cent. In addition, banks parked Rs 61,350 crore (Rs 613.5 billion) on a net basis with RBI through the reverse repo window.

Apart from interest rates, RBI also sought a feedback on restructuring of loans and relief given by banks to their borrowers.

Apart from Kamath, HSBC India chief Naina Lal Kidwai, Punjab National Bank [Get Quote] CMD K C Chakraborty, Canara Bank [Get Quote] CMD A C Mahajan, Bank of Baroda [Get Quote] CMD M D Mallya, IDBI Bank CMD Yogesh Agarwal, Uco Bank [Get Quote] CMD S K Goel and State Bank of India [Get Quote] MD R Sridharan attended the meeting.