New Delhi: Reserve Bank of India (RBI) might cut the Bank Rate in the upcoming busy season Credit Policy in view of the liquidity overhang in the domestic economy and lower interest rates abroad, feels Institute of Economic Growth (IEG).

"We may expect a cut in Bank Rate in the coming Credit Policy," IEG said in its latest report.

Bank Rate is the interest at which the RBI extends credit to the commercial banks.

The economic think-tank said the excess liquidity in the economy and lower interest rate structures prevailing abroad, would "lead to further decline in the short term interest rates in India."

Citing that Prime Lending Rates were above 10 per cent, while short-term interest rates were below 5.0 per cent, the Delhi-based institution said, "this huge spread discourages both savings and investments in the economy".

RBI had recently reduced the Repo rate by 0.5 per cent to bring down the short-term rates further and "lower interest rate structure continues", reasoning for the expectation in the bank rate cut.

Probably banks, which were holding high Forex reserves, must be waiting for maturity of Resurgent India Bonds that bear high interest rates, it said.

In this context, IEG forecasts that with foreign exchange pouring out due to maturity of RIB and widening trade deficit, Rupee is unlikely to further appreciate against the US Dollar and reduce Forex reserves in the coming months.

PTI