Foreign banks, charging borrowers 16 per cent or more compared to state-run banks' prime rates of 12 to 13 per cent, have argued the Reserve Bank of India (RBI) should lower interest rates now.

"We maintain that Reserve Bank of India should take direct measures to signal lower interest rates," ANZ Investment Bank said in a market commentary on Wednesday.

JP Morgan advocated last week a cut in the RBI's bank rate of 8.0 per cent and the government securities repurchase rate of 6.0 per cent.

But some bankers felt the RBI, which last cut rates on March 1, should wait -- the State Bank of India, the country's largest commercial bank, said last week rates should be stable for the next six to eight months.

"Actually I feel it may be too early to speculate about this right now," said Cherian Verghese, executive director at state-run Central Bank of India.

"Wehave to see whether the declining trend in inflation is sustained. If inflation drops, interest rates should follow but what we really have to look at is our cost of funds," he said.

"Unless the cost of funds comes down, there is no question of reducing lending rates."

Talk of rate cuts has been prompted by inflation bumping along at the lowest levels since the early 1980s and the rupee's resilience during the Kashmir crisis.

Bond prices have risen on the rate cut talk. Prices are up by as much as 30 paise (0.30 Rupees) since last Friday on the highly traded 12.40 per cent 2013 government bond.

But some bankers believe the RBI will opt to lower banks' 10 per cent cash reserve ratio (CRR) sooner than cut interest rates.

The RBI would like to lower rates to help along a brewing recovery in economic growth, but its room for manoeuvre is limited by banks' difficulties in cutting deposit rates.

Already suffering from slowing deposit growth, bankers fear lower rates would persuade depositors to puttheir money elsewhere, notably mutual funds.

The RBI has to balance its two-fold responsibility of managing monetary policy and safeguarding the profitability of a financial sector where state-run banks account for nearly 80 per cent of total bank deposits and advances.

A steep fall in inflation to below two per cent against over eight per cent this time last year, based on wholesale price index data, means India's real rate of interest has increased sharply.

"Real interest rates are high and it has more to do with the lending efficiency of banks," said Shekhar Sathe, chief executive officer, Kotak Mahindra Mutual Fund said.

Indian banks suffer from high transaction costs and stubbornly high non-performing assets, which as of end March last year accounted for more than 16 per cent of total advances.