Liquidity: The immediate concern of trade, commerce and industry would rightly be whether the banking system would be able to meet their legitimate demand for credit to meet their productive needs. The answer of the central bank would obviously be a firm "yes". The numbers, as one sees from the available data, indicate that there is adequate liquidity in the market; it is not lack of supply, but lack of demand.

In the absence of adequate credit demand, bank funds go abegging and are sometimes mopped up by the central bank, through open market operations, lest it should find its way to forex market. Banks tend to place the surplus funds on gilts, with the fond hope of exiting, when credit demand surges, albeit the interest and liquidity risk they may face in the process.

Interest rate: It is unlikely that the central bank will cut the bank rate, without reckoning the related issues. There is no denying the fact that the banks' interest rates have considerably softened in the last two years. The prime lending rates of banks dropped from about 14.50 per cent to 12 per cent; the deposit rate for three years and above have fallen from 13 per cent to 11 per cent. Financial institutions also dropped down their interest rates.

While there is, no doubt, interest-rate reduction may shore up the bottomline of the industry, the answer for stimulation of credit growth cannot lie in interest rate reduction alone; it depends upon investment programme of the corporates, which will be obviously determined on their perception of existing industry capacity, market demand, the rate of return/ profit margin. Mere interest rate reduction is unlikely to fill the bill of the magic wand, to stimulate investment in industrial sector.

Thus a comprehensive re-examination of the interest structure of various savings instruments-not confined to bank deposits alone -- is called for. Any reduction in the lending rate should necessitate corresponding reduction in deposit rate of one year and above; such a reduction should not result in household savings moving away from the banking channel, and banks may find it difficult to woo the savers back. Hence the bank rate and interest rate may remain unchanged.

De-regulation of interest rate of savings deposits: One hears at infrequent intervals the need for interest de-regulation on savings bank deposits rates. The moment the present rate-which is pegged at 4.5 per cent-is liberalised, one would expect some of the players jacking up the interest rate, forcing perhaps other players to follow suit. The savings bank accounts have to be viewed from the point of spread of banking habits and convenience of banking operations provided to a large number of householders at close proximity not merely from interest rates. Hence, the administered interest rate of savings bank should stay put.

Commercial paper: It is time to revisit the basis of commercial paper instrument. Now that the market is reasonably familiar with the nuances of CP, it would be desirable to delink CP from working capital and allow it to be floated as a clean borrowing instrument.To begin with, entry for such clean CP could be restricted to only those corporates who notch the highest credit rating for this short term paper.Export credit: Banks can be permitted to reckon their advances to export sector, as a component of the priority sector segment. The level of export credit refinance entitlement could be linked to the outstanding export credit, beyond the mandated target of 12 per cent.

Investment in equities: With the buoyancy in the equity market, banks are gradually entering the secondary equity market. The existing cap of 5%of incremental deposit for such investments can be increased to 10 per cent.