The lowering of interest rates in the current scenario can be attributed to the slow credit growth coupled with high deposit growth witnessed by the banks.

Credit growth of the banks has been low in the past five years but this year's figure has breached all the past records as it was only three fourth of what RBI had anticipated. As per the RBI data, total bank credit as on March 27th, 2009 was recorded at Rs 27,70,012.4 crore against Rs 4,08,099 crore, a year ago.

A growth of 17.3% was recorded for this period in contrast to 24% credit growth expected by the RBI at the beginning of the New Year. The central bank had said that the expected growth rate would also help the country to achieve a growth of 7% in its gross domestic product (GDP) for FY09.

The fall in the credit growth is recognized on the back of the decision taken by ICICI Bank to lighten its balance sheet and prioritize capital conservation. The bank recorded a fall in its loan portfolio to Rs 2,12,521 crore from Rs 2,25,616 crore between March and December 2008. This was in contrast to most PSU banks that recorded a 25% growth in their loan portfolios during the year.

Bankers report that loan growth in the various sectors has been different. Demand has been high from sectors comprising of oil, construction and infrastructure forms where the demand for home loans has remained almost stagnant. On the other hand there was a sharp fall in demand from the SME sector, gems and jewellery segments.

Besides the low credit growth, there has been a strong revival in deposit growth that raised the prospects for lowering the interest rates.

Although RBI has been taking moves to ease the interest rates in the economy but still the banks are not responding to the central bank's move in the way they should.

In fact RBI Governor D Subbarao says that if the banks are not lowering rates despite of the signals sent by the apex body, the transmission of monetary policy is weak.