This suggests that the RBI has been able to successfully stamp its authority on monetary issues, a process which gathered momentum with the March 1997 agreement between the Reserve Bank and the Government to phase out ad-hoc treasury bills.

"Large Government borrowings are hampering the ability of the monetary authority to cut interest rates," Kelkar said on Thursday. "As long as the Government is a large borrower, it reduces the effect of monetary policy," he said in his address at a Confederation of Indian Industry (CII) seminar in Mumbai.

The statement is in contrast to what Kelkar had said earlier this week at another CII meeting in Delhi. He emphasised that "interest rates should continue to move southwards" and made a strong pitch for a further lowering of interest rates as a key to industrial recovery.

At theseminar, Kelkar virtually admitted that the ministry had no business to meddle with interest rates: "Interest-rate policy is the domain of the Reserve Bank and I can see what problems the governor faces."

This also effectively puts to rest speculation that the finance ministry may force the central bank to undertake another round of rate cuts in the forthcoming credit policy to be announced on April 20.

On March 1, within 48 hours of the presentation of the Union budget, the RBI toed the line of finance minister Yashwant Sinha and announced a cut in bank, repo rates and cash-reserve ratio, which forced banks to cut their prime lending rates.

Kelkar seems to be have backed off from his earlier stand on rate cuts after he met Jalan on Wednesday. The governor has also managed to convince commerce minister Ramakrishna Hegde that it was not possible to continue with the special export refinance rates that were in force until March 31. Hegde had blamed the finance ministry and the RBI of sacrificing long-termgoals to achieve short-term targets.

"The Reserve Bank's maneuverability in respect of interest rates is restricted by the Government's huge fiscal deficit," Kelkar said at Thursday's meeting, adding that to reduce the deficit the Centre would have to cut expenditure.

The Centre had, in the latest budget, decided to set up an expenditure committee after spending rose by 27 per cent over the budgeted figure in fiscal 1999. "A reduction of the revenue deficit and doing away with subsidies will give the central bank more room to fiddle with interest rates," he said.

Kelkar said the Government had decided to wait until the submission of the Verma Committee report before deciding on setting up asset-reconstruction companies to bail out weak banks. The committee, which is looking at a revival strategy for weak banks like Indian Bank, Uco and UBI will submit its report on June 30.

FIs rule out rate cuts

Taking a cue from the finance secretary, the financial institutions ruled out any rate cuts. "Ido not see any possibility of my institution cutting rates," Industrial Development Bank of India chairman GP Gupta said. Industrial Finance Corporation of India chief PV Narasimham concurred saying there is no plan for a rate cut now.