Thus, banks have been assured ample liquidity. Lest the banks invest in government paper, the RBI is making bonds expensive. The intention seems to be to veer the banks into lending to business at reduced interest rates during the last two months of the busy season. But the proximate reason for paring bond yields could be less ambitious. Up to the end of January 1999, the government's gross market borrowings amounted to Rs 83,753 crore. Since repayments due in the fiscal amount to Rs 16,353 crore, the Centre's net borrowings amounted to Rs 67,400 crore, in excess of the revised estimate of Rs 64,911 crore for 1998-99. For now the government does not need to borrow. The RBI can seek to nudge the banks lend to business at less usurious rates in thecoming months.

Some banks have already announced their intention to reduce their prime lending rates. Credit demand is weak relative to the availability of funds. So banks should be wooing business borrowers. But they cannot reduce lending rates sharply. There is no question of relenting on provisioning for NPAs, though the budget for 1999-2000 does offer some concessions in this regard. Business is, however, looking for a substantial reduction. The RBI's move to lower interest rates could inspire the banks to reduce their deposit interest rates. They could cut medium term deposit interest rates by a full percentage point in the wake of the reduction in interest on small (postal) savings. They could also cut short term deposit interest rates in consonance with the reduction in repos rates. But banks will not be in a position to pass on the entire saving in deposit costs to lenders; part of the saving will be absorbed by larger wages to bank employees.

What is on the cards is but a small reduction inlending interest rates. It would have been a different matter if deposit interest rates could be brought down substantially. The trouble is that inflation, as measured by the consumer price index, is high (15 per cent last January). Unless inflation comes down substantially, deposits, which are savings (or postponed consumption), will fetch negative real interest. Paradoxically, business is hurt by high real borrowing interest rates because inflation, as measured by the wholesale price index (this affects costs and prices) is about five per cent.