With inflation cooling down to the comfort level, public-sector Punjab National Bank (PNB) expects the banking regulator RBI to cut the interest rate further so as to press banks on rate cut.

PNB's Chairman, K C Chakrabarty said, "The Reserve Bank of India (RBI) would further cut down key policy rates with inflation continuing its downward trend."

"There is scope for further reduction by the RBI and even banks have room to lower their rate at a time when inflation is easing on week-on-week basis," he added.

Inflation rate in the country has declined to 12 month low level of 4.39% for the week ending on January 31st.

Even though the RBI cuts the policy rates, the real difference is only made after the banks lower their interest rates. "The Reserve Bank is giving continuous signals that interest rates should come down. But banks are not responding," he said.

"If banks are not responding, the Reserve Bank will further cut it (rates) and compel the banks to cut rates," added Chakrabarty.

In third quarterly review of the credit policy, RBI did not revise the key policy rates. As a result only few banks reduced their interest rates while others still have not taken any action.

However PNB slashed its prime lending rate (PLR) by 50 basis points to 11.5% at the beginning of the month.

Also as the industrial production has slipped to a 15-year low level in December 2008, RBI is more likely to slash the rates.