As a result of the large government market borrowing programme, interest rates tend to remain high and there was no way that interest rates in non-government debt market could be kept at reasonable levels, Tarapore said while delivering in his luncheon address at the Invest India's conference on "The Future of India's Debt Market" here.

"The dilemma was that infrastructure cannot tolerate interest rates above a certain level and it needs resources for very long period," he noted and said if the government was itself raising money through gilts at relatively high rates and for short periods, infrastructure financing would get into a bind.

"While heroic efforts are being made to use innovative financial engineering to resolve this problem, I am afraid there are no easy solutions," he observed.

He said any meaningful development of the debt market was not possible if the government insisted on creating a sheer glut of government paper in the market.

"It is totally erroneous to believe that the move to market-related rates of interest can ensure an unlimited amount of investment in government paper," Tarapore said.

Tarapore said that the RBI needs to drastically change from primary market operations to strong presence in the secondary market with two-way quotes. "At the present time, the RBI's legitimate preoccupation with overall liquidity control prevents it from undertaking an active role in the secondary market," he observed.

The much-talked-about yield curve can emerge only if the RBI is in a position to offer a liquidity adjustment facility (LAF) under which the apex bank provides liquidity under a repo and reverse repo facilities, he said.

Tarapore said interest rates on treasury bills suddenly rise in the secondary market when there is some tightening which indicates total lack of secondary market liquidity.