More than his meeting with the Reserve Bank governor, the interface with banks threw up a surprise. Banks told Kelkar that majority Government ownership of their equity was a stumbling block. Banks need more capital. Risk assets are on the rise, and cyclical fluctuations in the economy bloat the requirement to cover NPAs. Besides, banks are required to meet the proposed hike in the capital adequacyratio. The short point is that banks need to make large capital issues. Unless the Government subscribes to these in a big way, its equity stake in the banks will decline. Given the tight fisc, the Government must let its stake fall below 51 per cent. Banks also want to invite foreign subscription to their equity, especially those with a large presence abroad. Banks thus called for two policy decisions. One relating to minority Government stake in nationalised banks and the other to foreign ownership of their equity. Furthermore, there was the implicit hint to Kelkar that banks are not exactly in clover; their existing margins leave no room to reduce lending interest rates.

So Kelkar reverted to the old Rangarajan line of a sharp but phased reduction of the CRR. This is unlikely to have cut ice with Bimal Jalan. Rangarajan had announced a CRR reduction programme on the assumption that the Government would keep deficit financing under control. It did not. CRR reduction added to liquidity and the consequentdecline in interest rates stoked speculation against the rupee. It was left to Jalan to unscramble the egg. Kelkar could argue that this time round the finance minister wants the rupee to depreciate. Trouble is, post-Rangarajan, the Government has virtually given up deficit financing (ad hocs) and now resorts to mega borrowings with dated paper. Government borrowings invariably exceed budget targets. Unless the Government reduces borrowings, CRR cuts will only accommodate the Government; interest rates will not decline but will be stable around the current high. The moral for Kelkar is that an interest rate policy is contingent on fiscal policy.