For example, in a tight liquidity condition, even if the policy rate is reduced banks may not be in a position to reduce deposit rates and hence lending rates with the apprehension of losing deposits. There could be other considerations for not lowering deposit rates if rates of return in competing products such as small savings and mutual funds are more attractive.
Another consideration in a falling interest rate scenario could be that banks might want to protect their profit margin through a more sluggish adjustment of their lending rates. Notwithstanding various complexities, the interest rate channel of monetary transmission has been evident over the monetary policy cycles in the recent years.