How to read commands from a file and execute them?

Why don't you just use source?

source cmds.txt

Or even shorter:

. cmds.txt

Since you've set IFS to just a newline, when it does word splitting on $i it only splits it at newlines, the spaces are no longer treated as delimiters. So the entire line is taken as the command name, not a command followed by arguments.

But if you fix that, it still won't work, because quotes are not processed after expanding a variable. You need to use eval to put it through all the rules of command parsing.

IFS=$'\n'; for i in `cat cmds.txt`; do eval "$i"; done

But instead of using for and having to set IFS, you could do:

while read -r i; do eval "$i"; done < cmds.txt

Putting commands in variables isn't a good idea, but if you want to do it any way, then you can do this:

while IFS= read -r line; do
${line[*]}
done <cmds.txt

Note: Don't use quotes in variable $line ( "$line" or "${line[*]}" ). It won't work for this case.

One way to use your existing code while avoiding using eval might be:

IFS=$'\n'
for i in `cat cmds.txt`; do #use of $(<cmds.txt) is better than `cat cmds.txt`
bash <<EOF
${i[*]} 
EOF
done

Note: using cat and for to read line from file isn't recommended, use while loop instead.