PSU banks on Monday assured the government of reducing interest rates in the backdrop of falling bank deposit rates, a move that would boost economic activity, especially in the cash-strapped realty, construction and auto sectors.

"As deposit rates have moderated, there is general expectation that interest rates will come down," finance secretary Arun Ramanathan told reporters after the review meeting of PSU banks with external affairs minister Pranab Mukherjee, who is also holding the charge of the finance ministry.

To boost the economy, the RBI has taken a slew of measures since September last year, including cuts in the cash reserve ratio and short-term lending (repo) rate, to inject funds into the system and signalled a soft interest rate regime.

PSU bankers' meeting is being held in the backdrop of the third quarterly review of monetary policy by the Reserve Bank of India [Get Quote]. The latter observed that most banks have reduced lending and deposit rates to some extent, but there are some that are yet to do so.

The banks could take a view on the interest rate cut, which may be more than 50 basis points, and firm up steps to increase the flow of credit to industry, reeling under the impact of slowdown.

Meanwhile, earlier in the day Indian Banks' Association chairman T S Narayanasami said that banks were going to reduce interest rates and the timing of the rate cuts would be discussed at the meeting with Pranab Mukherjee.