In the light of credit offtake not picking up despite ample liquidity in the system, the RBI is likely to keep policy rates unchanged in its annual monetary policy, to be unveiled on Tuesday, but may impress upon banks to step up lending to sectors slowing down.

The RBI has given enough indication to banks to ease rates in response to a series of policy rate cuts undertaken to ease liquidity pressure and step up growth.

As recently as two weeks ago, RBI Governor D Subbarao at a seminar had said, "The response of (the) banking system (to the policy actions) has been positive ... but banks are yet to respond as much as warranted by the policy."

According to UCO Bank Chairman and Managing Director S K Goel, "I think (the) RBI is unlikely to alter policy rates. It would rather maintain (the) status quo this time."

He, however, expects the apex bank to advise all banks to ease rates in step with policy rate cuts so far post the Lehman crisis.

Indian Bank Chairman and Managing Director M S Sundararajan said there is enough liquidity in the system and the RBI would like to ensure adequate credit flows to productive sectors.

After reaching a peak of 29.4 percent (Rs 5,82,344 crore) on a year-on-year basis as on October 10, 2008, non-food credit growth has declined sharply.

The repo rate, the rate at which the RBI lends short-term funds to commercial banks, has been reduced from 9 percent in October to 5 percent now.

Similarly, the reverse repo, the rate at which banks park overnight funds with RBI, has been brought down from 6 percent to 3.5 percent.

Non-food bank credit growth decelerated to 19.7 percent (y-o-y) as on February 13, 2009, compared with 22.7 percent as on February 15, 2008, as credit expansion during the period between December 19, 2008, and February 13, 2009, at Rs 8,091 crore was sharply lower than the Rs 86,978 crore in the corresponding period of the previous fiscal.

Since October, the RBI has reduced the percentage of deposits kept with the apex bank, called the cash reserve ratio, to 5 percent from 9 percent at the end of July 2008.

As a result of various measures taken by the RBI, it has infused over Rs 4,00,000 crore into the system.

Whatever signal the RBI gives banks would follow, Sundararajan said, adding, banks will be responsive this time also, as in the past. While bankers feel that the RBI would maintain the status quo, there is expectation of policy rate cuts in May.

"(The) RBI is likely to cut (the) repo and reverse repo (short term lending and borrowing) rates 50 basis points by May-end to help banks reduce lending rates further," Oriental Bank of Commerce Executive Director S C Sinha said.

Yes Bank Chief Economist Shubhada Rao stated, "While there is headroom for easing policy interest rates further against the backdrop of slowing growth, we believe any rate action will be deferred for later."

The RBI is unlikely to cut rates on April 21, Rao said, adding the complete pass-through of the previous rate cuts is yet to fully happen in the shape of lower lending and deposit rates of banks.

Although interest rates have dropped from their high levels, there is scope for rates to decline further, she said. According to Goldman Sachs, the RBI is unlikely to cut the benchmark reverse repo rate at the policy meeting.

However, the apex bank may cap the amount that banks can put in the reverse repo window, currently running at historic highs, to encourage more lending.

"We also see scope for reducing the interest rate corridor by cutting the repo rate by 50 basis points. The real challenge for the RBI is how to deal with the ever-enlarging fiscal deficit and getting long bond yields down," it said.