The table shows the relationship between bank liquidity and interest rates. It will be noticed that there was a spurt in bank liquidity in 1996-97. This led to a sharp fall in prime lending rates. The rate of increase in bank liquidity slowed down substantially in 1997-98. Consequently, PLR too was reduced only marginally.

In 1998-99, bank liquidity surged by over Rs 1,5000 crore. Consider the effect on PLR, which went down to 13 per cent, and then to 12 per cent with the latest CRR cuts.

So what trends can be discerned for the future? To answer that question, we need to take a look at the most recent data. Between January 29, 1999 and March 26, 1999, deposits of the banking system increased by Rs 27,002 crore, compared to an increase of Rs 10,703 crorebetween November 27, 1998 and January 29, 1999. Compare the corresponding period of 1998.

Deposits increased by Rs 37,175 crore between January 30, 1998 and March 27, 1998. The increase was Rs 10,418 crore between November 28, 1997 and January 30, 1998. The increase in deposits during the last two months has been much lower than that in the corresponding period of 1998.

On the credit side, the growth in bank credit was Rs 16,174 crore between March 26, 1999 and January 29, 1999, and Rs 13,070 crore in the preceding two months. The corresponding growth for 1997-98 was Rs 17,018 crore between January 30 and March 27, 1998, and Rs 19,114 crore in the preceding two months. So credit growth in the last few months of 1998-99 has been more sluggish than in the corresponding period of 1997-98.

While lower credit offtake has offset the lower deposit growth, it will be noticed that it does not neutralise it fully. This indicates that monetary conditions currently are tighter than at the beginning of 1998-99,which is reflected by the fact that money market yields prevailing currently are higher than those prevailing in April 1998. A further CRR cut in the credit policy would be in order.