But the bold reversals of the reductions in CRR of banks (in support of the rupee) have helped to counter the consequent liquidity expansion. Finally, the Reserve Bank has successfully acted (on the eve of releasing theannual report) on the programmed sale of a substantial portion of government securities, which had devolved on it. Burgeoning RBI credit to government (monetised deficit) has been sharply reined in. Deposits are increasing rapidly. The rise in food credit will start declining as sales are effected out of official stocks of grain to stabilise prices. The fall in petroleum credit -- in the wake of low oil import prices -- has created space for the banks to accommodate production credit. So interest rates will not rise.

Monetary policy has worked well so far. There is no reason for the RBI to raise monetarist alarms. But the government could act cussed by borrowing more than the colossal amount budgeted. Last year, it got away with excess borrowings because financial savings of the household sector rose to 11.4 per cent of GDP from 10.8 per cent in the previous year. Also, financial savings flowed into bank deposits at the expense of investment in shares and debentures. But if investment is to revive (greenshoots are in evidence) and give a fillip to to infrastructure growth, floatations of equity, bonds and debentures will need to draft more financial savings from households. If government borrowings crowd out investment in such financial assets, interest rates are bound to rise to the detriment of investment growth and capital flows. So much will depend on the success of the government's disinvestment programme. The markets will keep a close watch on this and the government's revenue collections. The sound piece of monetarist advice from the RBI is that the government should stick to its commitment of fiscal-deficit reduction.