On Saturday, the Reserve Bank of India cut the repo rate or its main short-term lending rate by 50 basis points to 7.5 per cent and banks' cash reserve requirements (CRR) by 100 basis points to 5.5 per cent.
The RBI cut banks' bond reserve requirements by 1 per centage point to 24 per cent of their deposits with effect from November 8, 2008.
The move to cut rates on Saturday follows a 100-basis-point cut in its main short-term lending rate last month.
"With the CRR and the repo rate cuts, there is additional elbow room for banks to lend," said K. Ramakrishnan, chief executive of Indian Banks' Association, which represents more than 160 banks.
The CRR has released a lot of money into the coffers of the banks and therefore the cost of funding should also come down, he said adding most banks would take a call on their interest rates over the next week.
The latest CRR cut would release 400 billion rupees into the system, on which banks were not earning any interest, said M.V. Nair, chairman and managing director, Union Bank of India.
He also said the cut in bond reserve requirement would release another 400 billion rupees into the system.
"It's a clear indication that there is a downward spiral in interest rates as the pressure for raising deposits at substantially higher rates has reduced," he said.
"With the liquidity infused, the interest rates on wholesale deposits would come down," said M.D. Mallya, chairman and managing director, Bank of Baroda.
However, there would be a lag effect on cut in deposit rates as the re-pricing would be done only on new deposits while in lending, it would be across all loans linked to the respective prime lending rates of the banks, Mallya added.
"With liquidity no longer a concern, interest rate scenario would be moving southwards".
However, banks were cautious towards extending credit to unsecured areas such as personal and consumer loans although credit to productive sectors would continue, Nair said.
"With prices of crude oil and commodities coming down, the focus would shift towards growth. It is a balance between maintaining growth momentum and inflation," Nair said.